AICredit note: what it means, when to issue one and a template
A credit note is a document you send a customer to reduce or cancel an invoice you have already issued. You issue one when goods arrive damaged, a delivery was short, you charged the wrong price or the customer returns stock. Once an invoice has gone out, don't edit or delete it; raise a credit note against it instead. This guide explains the credit note meaning, when to issue a credit note, what it must show, a credit note template you can copy and the difference between a credit note and a debit note.
1. Credit note meaning: what it is and what it does
A credit note is a negative invoice. It records that the customer owes you less than the invoice said, by how much, and why. It always points back to the invoice it corrects.
Once issued, the credit can be settled in one of three ways, and the credit note or your covering email should say which:
- Against the original invoice, if it hasn't been paid yet. The customer pays the invoice total minus the credit.
- Against a future invoice, if the customer has already paid and orders regularly. The credit comes off their next bill.
- As a refund, if the customer has paid and won't be ordering again soon, or asks for the money back.
The reason for raising a credit note instead of changing the invoice is the record. The customer may already have entered your invoice in their accounts, and if you're VAT registered, you have accounted for the VAT on it. Changing the original leaves two versions of the same invoice in circulation. A credit note leaves the original as it was and adds a dated record of what changed, which you and your accountant can follow months later.
2. When to issue a credit note: common wholesale reasons
Issue a credit note when the amount on an invoice you've already sent turns out to be more than the customer should pay. These are the reasons that come up most in wholesale:
| Reason | Example | What to credit | Check first |
|---|---|---|---|
| Damaged goods | 3 of 24 candles from Ember & Wick arrive with cracked glass | The damaged units at the price on the invoice | Photos of the damage and the outer box, and whether the damage was noted on the delivery note |
| Short delivery | Kindred Skin invoiced 12 cleansers but only 10 were packed | The missing units, unless the customer wants them sent on instead | Your packing record and the delivery note |
| Price error | Wildfire Chilli Co invoiced sauce at £4.40 a bottle instead of the agreed £4.20 | The difference per unit times the number of units | The price on the purchase order or the price list the customer ordered from |
| Returns | A gift shop returns unsold Christmas gift sets under an agreed returns arrangement | The units returned in saleable condition, less any handling charge you agreed | That the return was agreed in advance and the goods arrived back in the condition agreed |
| Cancelled order | The customer cancelled after the invoice went out but before dispatch | The whole invoice | That nothing was sent |
| Duplicate invoice | The same order was invoiced twice | The whole duplicate | Which invoice the customer has already booked or paid |
On a short delivery, it is better to invoice what you sent in the first place. Our guide to purchase orders and invoices covers how to match the invoice to the delivery so you need fewer credit notes.
When not to issue a credit note
- The invoice is still a draft. If it hasn't been sent, correct it.
- The customer just hasn't paid. An unpaid invoice needs chasing, not crediting. Our guide to chasing unpaid wholesale invoices has the emails.
- You haven't checked the claim. A credit note says you agree the customer owes less. Check the photos, the delivery note and your records first, then issue it for the amount you agree.
3. What a credit note must show
If you're VAT registered, HMRC expects a credit note to show:
- Its own credit note number and date
- The original invoice's number and date
- The reason for the credit
- The goods credited and the amounts
- The VAT being adjusted
Add the details you would put on any invoice: your business name and address, your VAT number if you have one, and the customer's business name and address. Title the document "Credit note" in large type, so nobody in the customer's accounts team mistakes it for a bill.
Give credit notes their own number sequence, such as CN-001, CN-002, rather than borrowing from your invoice numbers. Accounting software usually does this for you.
For zero-rated products, the VAT line still appears, showing £0.00. When Wildfire Chilli Co, a chilli sauce maker in Bristol, credits a deli for the price error in the table above, the credit is 12 bottles × £0.20 = £2.40, with no VAT, because the sauce is zero-rated food. A credit on candles or skincare, which are standard-rated, carries 20% VAT on top.
4. Credit note template
Copy these fields into your accounting software, a spreadsheet or a document. The example is Ember & Wick, a candle maker, crediting a gift shop for three candles that arrived cracked.
| Field | Example |
|---|---|
| Title | CREDIT NOTE |
| Credit note number | EW-CN-014 |
| Credit note date | 11 November 2026 |
| From | Ember & Wick Ltd, business address, VAT number |
| To | Hollin & Hearth, Ilkley, the customer's business address |
| Original invoice | EW-2291, dated 4 November 2026 |
| Customer's PO number | HH-388 |
| Reason | 3 candles arrived with cracked glass, noted on the delivery note signed 6 November 2026 |
| Line | FC-200, Fig & Cedar soy candle 200g, 3 units at £6.75 = £20.25 |
| Subtotal credited | £20.25 |
| VAT credited (20%) | £4.05 |
| Total credited | £24.30 |
| How it will be settled | Deducted from invoice EW-2291. Balance now due: £170.10 by 4 December 2026. |
How the account looks afterwards
Invoice EW-2291: 24 candles at £6.75 = £162.00, plus VAT £32.40 = £194.40
Credit note EW-CN-014: 3 candles at £6.75 = £20.25, plus VAT £4.05 = £24.30
Balance due on EW-2291: £194.40 − £24.30 = £170.10
The invoice still shows £194.40. The credit note and the balance tell the rest of the story.
5. Credit note vs debit note: what is the difference?
A debit note is the opposite of a credit note. A credit note reduces what is owed; a debit note is a request or record that increases it.
| Credit note | Debit note | |
|---|---|---|
| Effect | Reduces what the customer owes on an invoice | Increases what is owed |
| Typical use | Damage, shortages, price errors, returns, cancellations | Undercharging, or extra goods or charges agreed after the invoice |
| Example | Crediting £24.30 for three cracked candles | Kindred Skin invoiced 10 cleansers, sent 12 with the buyer's agreement, and requests payment for the extra 2 |
| Refers to | The original invoice | The original invoice |
Some suppliers raise a new invoice for an extra amount instead of a debit note. Ask your accountant which your software and VAT records should use, then stick to it.
You may also receive a debit note from a larger buyer. When a buyer sends one for a shortage or damage, treat it as a claim against you. Check it against your delivery note and photos, and if you agree, raise your own credit note so your records match theirs.
6. How to issue a credit note, step by step
- Agree the amount with the customer. Confirm the number of units and the reason in writing, by email or on a signed delivery note.
- Decide how it will be settled. Against the original invoice, against the next one, or as a refund.
- Raise it against the original invoice in your accounting software. Xero, QuickBooks and Sage all have a credit note option, and linking it to the invoice updates the balance.
- Use the same product codes and prices as the original invoice, so each line is easy to tick off.
- Send it with a short email that states the new balance.
- Refund or allocate it. If you're refunding, pay it and record the payment against the credit note. If it's being set against a future invoice, make sure that invoice shows the deduction.
- Fix the cause. If credits for the same reason keep coming up, such as breakages in transit, change the packaging or the courier. Your wholesale terms and conditions should say how quickly customers must report damage and shortages.
Here is an email you can adapt:
Subject: Credit note EW-CN-014 for invoice EW-2291
Hi Priya,
Sorry the three Fig & Cedar candles arrived cracked. I've attached credit note EW-CN-014 for £24.30, which brings the balance on invoice EW-2291 down to £170.10, still due on 4 December.
There's no need to send the broken candles back. If you'd like three replacements, reply to this email and I'll add them to your next order.
Thanks,
Sam, Ember & Wick
Questions about credit notes
What is a credit note?
A credit note is a document a supplier issues to reduce or cancel an invoice that has already been sent. It refers to the original invoice and shows the amount credited and the reason.
When should a credit note be issued?
Issue a credit note when an invoice you have already sent charges more than the customer should pay, for example because goods arrived damaged, the delivery was short, the price was wrong or stock was returned.
What is the difference between a credit note and a debit note?
A credit note reduces what a customer owes on an invoice. A debit note does the opposite: it requests or records an increase in what is owed.
Can I edit an invoice instead of issuing a credit note?
Not once it has been issued. Leave the original invoice as it is and raise a credit note against it, so there is a clear record of what changed and why.
Is a credit note the same as a refund?
No. A credit note records that the customer owes less; the credit can then be deducted from the original invoice, set against a future invoice or paid back as a refund.
What should a credit note include?
Its own number and date, the original invoice number and date, the reason, the goods and amounts credited, and the VAT being adjusted. Add your business details, the customer's details and your VAT number if you are registered.
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