Common scenarios for credit notes

Here are a few typical occasions when you might need to use a credit note, and how you'd do this in Xero.

Your user role will determine whether you have access to add and view credit notes. Note: credit notes cannot be applied to invoices or bills created as part of a pay run.

Common scenarios for credit notes

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.

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