What is a Credit Note?

A credit note is the mirror image of an invoice. Where an invoice increases what the buyer owes, a credit note decreases it — it carries a negative value, references the original invoice number, and sets out the reason for the reduction. In the seller’s books it debits (reduces) revenue and credits the buyer’s accounts-receivable balance. If the buyer has already paid, the credit note becomes a refund payable in cash; if not, it offsets the outstanding invoice so the buyer pays only the net amount on the next settlement.

Credit notes exist because simply editing or deleting an issued invoice would break the audit trail — once an invoice has a sequential number and has been sent to a customer, it cannot be silently changed. A separate credit-note document preserves the original invoice intact and creates a clear, dated, referenceable record of the correction. VAT and sales-tax rules generally require the credit note to be issued in the same tax period as the original invoice or the period the error is discovered, so that the tax reduction is reported correctly.