Add a credit note to reduce the amount owed to you by a customer, or that you owe to a supplier. A credit note remains in Awaiting Payment until it has been fully applied to an invoice or bill.
Credit notes can be added in 3 ways in Xero, depending on how you need to issue or record the credit. You can:
- Add a credit note directly to an existing sales invoice or bill
- Add a new credit note for a customer or supplier
- Copy an existing credit note.
Adding, editing, copying, approving, deleting and voiding credit notes is the same for both a sales invoice and a bill. If you're not sure when or how to use credit notes, some common scenarios are provided below as well.
Credit a specific invoice or bill, or part of it
From an invoice or bill that is Awaiting Payment, choose 'Add Credit Note' from the Invoice Options or Bill Options button.
- This will populate an Sales credit note or Purchases credit note with the same data as on the invoice or bill and will default to the amount of the credit to be the amount outstanding on it.
- You can use this option to credit an entire invoice or bill, or one that has part payments or other credit notes already applied to it.
- Even if the customer or supplier already has credit (i.e. other credit notes that have not yet been allocated) you can add a new credit note for this invoice or bill.
- If you would rather use up the existing credit that the customer or supplier already has, use the link that is displayed on the Sales or Purchases awaiting payment invoice or bill.
- Apply a credit note to an invoice or bill that's in a locked period as long as the credit note is not in the locked period as well.
- You can only add credit notes to invoices or bills that are Awaiting Payment. Refer to our Common Credit Note scenarios below to see how you might handle a situation where credit is required for a Paid invoice or bill.
You can create as many credit notes as required for an invoice or bill as long as the total amount credited is no more than the amount outstanding on it.
Add a new credit note to a Contact (regardless of the invoices or bills they may already have)
From Sales or Purchases, click + New drop-down and select Credit note.
- This will create a Sales credit note for the customer or a new Purchases credit note for the supplier.
- Once approved, you can allocate some or all of this credit note to an invoice or bill already in Xero for the customer or supplier or save it to use at a later date if there are no invoices or bills. The credit note needs to be approved before it can be allocated.
- Several credit notes can be allocated to an invoice or bill as necessary.
Once a credit note has been added (whether it's allocated to a sales invoice or bill or not), its status will determine what you can do with it. As with invoices or bills, credit notes can have a status of Draft, Awaiting Approval, Awaiting Payment, Paid, Deleted or Voided. They will be displayed on the tab that matches its status along with invoices or bills and are identified with a 'CR' icon. If a credit note is allocated to an invoice or bill, it will display an icon showing that a credit note is attached to it.
- Search for a credit note using Contact name, credit note number, reference or date. Click on the Search button to unravel the search panel. You can search on the All tab for any credit note or from any of the status tabs for credit notes of just that status (e.g. Awaiting Payment).
- 'Approved' credit notes can be allocated to invoices or bills and are counted in reports. Credit notes are approved if they have the status 'Awaiting Payment' or 'Paid'. Credit notes from a locked period can be allocated to an invoice or bill that is not in a locked period and vice versa - the date of allocation (and therefore journal entry) will be the latter of the invoice, bill or credit note.
- An Awaiting Payment credit note is one that is waiting to be allocated to an invoice or bill - either in full or in part, or waiting to be refunded.
- A Paid credit note is one that is fully allocated to an invoice or bill or has had a full cash refund applied.
- Credit notes that are not yet approved can be deleted and fully edited.
- Credit notes that have been approved can be voided and only the account and tracking (if used) can be edited.
- If a credit note that is awaiting payment, or is fully allocated, or is cash refunded is voided, it will be reversed on the invoice or bill (i.e. the credit allocation will be removed) before being voided. The act of removing a credit allocation from a paid invoice or bill will return it to an Awaiting Payment status.
- Credit notes display on graphs are displayed as the net value of the total amount owing or owed or the net value for a customer or supplier. Where a customer or supplier is in credit, the credit balance alone will be displayed.
- One or more credit notes can be created for a Contact without being applied to an invoice or bill, however it is good practice to use up the existing credit a customer or supplier has if you enter a new one for them.
- You can apply a cash refund to an awaiting payment credit note.
- You can only allocate a credit note to an invoice or bill for the same Contact (even if that Contact has had a name change or has been merged or archived in between creating the credit note, invoice or bill).
A credit note is very similar to a sales invoice or bill, except it reduces the amount owed to you by a customer, or that you owe to a supplier. It's raised against a customer or supplier and remains in awaiting payment until it has been fully applied to an invoice or bill.
A credit note can be raised directly against a customer or supplier, allowing the customer or supplier to be held in credit until a future invoice or bill is raised.
Here are a few typical occasions when you might need to use a credit note, and how you'd do this in Xero.
You issued an invoice and the customer noticed a mistake before paying
In this case, the customer hasn’t paid the original invoice because they have noticed a mistake. Assuming you raised the invoice for 11,000 against your Sales account, but it was supposed to be for 10,000, then you can raise a credit note for 1,000 against your Sales account. You will be immediately prompted to apply this credit note to the invoice, reducing the amount owing on the invoice to 10,000. Your Profit and Loss report will now reflect 10,000 of sales and your tax liability will be adjusted.
You issued an invoice, the customer paid and then returned some or all of the goods
In this case, the customer has fully paid the invoice and as you will be doing business with this customer in the future, they have agreed for you to hold the credit until next time you invoice them. Assuming you raised the invoice for 10 widgets at 1,000 each, you can raise a credit note for 5 widgets at 1,000 each. As the invoice is fully paid, you will not be able to apply the credit note against the invoice, so the credit note will remain in an ‘Awaiting Payment’ status. When you next raise an invoice for this customer, you will be prompted to apply the credit note.
You issued an invoice, and then later agreed to apply a discount to the invoice
Assuming you raised the invoice for 10,000 against the Sales account and agreed to give a 15% discount, then the customer will pay you 8,500, leaving 1,500 outstanding on the invoice. You can raise a credit note for 1,500 against a discounts account and you will be prompted to apply the credit note to the invoice, leaving the invoice and the credit note fully paid. Your Profit and Loss report will now reflect 10,000 of sales and 1,500 of discounts.
You issued a credit note and want to pay a cash refund to the customer
Simply apply the cash refund at the bottom of the credit note.
- You issued an invoice and your customer has overpaid you: create a Sales overpayment
In this case you have not reduced what your customer owes; your customer has simply overpaid leaving their account in credit. Let's say you raised a sales invoice for 250 but your customer paid you 300. Instead of refunding them the 50, you agree to reduce the amount owing on their next invoice. Add the overpayment when you reconcile the bank account, then allocate that credit to the next invoice you issue them.