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Definition

Credit note

A credit note is a document issued by a seller to reduce or cancel an amount already invoiced, creating a negative receivable in the seller's accounts and a reduction in the buyer's payable — typically issued after a return, overcharge, or cancellation.

A credit note is raised when a sales invoice needs to be wholly or partly reversed: a customer returns goods, the amount was wrong, a discount was agreed after the fact, or a service was not delivered. Rather than deleting the original invoice — which breaks the audit trail — you issue a credit note for the relevant amount and allocate it against the invoice.

How Xero handles credit notes

In Xero, a credit note sits within the same Accounts Receivable (or Accounts Payable, for supplier credits) workflow as invoices. Once raised, you allocate it against the outstanding invoice: the balance drops and, if the customer has already paid in full, Xero can hold the credit note as an overpayment to offset a future invoice or initiate a refund.

The bank feed matters too. If you refund cash, the outgoing bank line must reconcile against the credit note — not the original invoice — otherwise the invoice stays open and the refund sits unexplained. Unallocated credit notes at month-end inflate the debtors ledger and understate income on the profit and loss.

VAT follows the same logic: the tax point of the credit note, not the original invoice date, determines which VAT period the adjustment falls in.