Credit note
A document a seller issues to reduce or cancel an amount it has invoiced, for example after a return, a price error or a discount.
In short
- It is the proper way to correct an invoice once issued. The original invoice is not edited or deleted.
- It reduces the customer's balance and the seller's revenue.
- Sales tax charged on the original invoice is adjusted through the credit note.
A credit note, or credit memo, reduces what a customer owes. Once an invoice has been sent, it should not be changed or voided in place, because the customer and the tax authorities may already rely on it. Any correction is made by issuing a credit note that refers to the original invoice.
Common reasons
- Goods returned or damaged
- A price or quantity billed in error
- A discount or rebate agreed after invoicing
- Cancelling an invoice issued by mistake
- Settling a customer dispute
How it works in the books
The seller records the credit note as a reduction of revenue and of accounts receivable. The customer can use it against future invoices, or the seller can refund it. On the buyer's side, a credit note reduces accounts payable and the related expense.
Sales tax
A credit note reverses the tax charged on the original invoice in proportion. In Canada, a GST/HST credit note must contain specific details, including the supplier's name and registration number, the recipient's name, the amount of the adjustment and the tax. The supplier reduces the tax it owes, and the buyer reduces the input tax credit it claimed.
A debit note is the buyer's equivalent: a request for the same correction from the other side.
Worked example
Correcting a price error
A supplier invoices 50 units at $40 instead of the agreed $36, for $2,000 plus $260 HST. It issues credit note CN-208 referring to the invoice, for 50 × $4 = $200 plus $26 HST. The customer's balance for that invoice drops from $2,260 to $2,034, and both sides adjust their HST.