What Is a Credit Note? When to Issue One, With Examples

A credit note is a document that reduces the amount a customer owes on an invoice already issued. It is the correction mechanism of invoicing — and the reason a correctly run ledger never edits or deletes an issued invoice.

That principle is the whole point. An issued invoice has been sent to a customer, numbered in a legally required sequence, posted to the general ledger, and reported on a VAT return. Changing it after the fact would mean your copy and the customer's copy disagree, the numbering has a hole, and a filed return no longer matches the books. A credit note fixes the amount while leaving the history intact — the same append-only logic as a reversing journal entry.

When to issue one

• Goods returned. The customer sends back part or all of the order.
• Post-sale discount. A volume rebate, a goodwill reduction after a complaint, an agreed price adjustment.
• Billing error. Wrong quantity, wrong price, wrong VAT rate — anything overstated on the original.
• Cancelled supply. The service was never delivered but the invoice was already issued.
• Wrong customer. The invoice went to the wrong entity: credit it in full and invoice the right one.

The test is simple: if the amount the customer legitimately owes is lower than what an issued invoice says, you need a credit note.

What it does to the ledger

A credit note is the mirror of the invoice it corrects. Crediting 200 € plus 21% VAT of a 1,000 € invoice:

Account	Debit	Credit
5001 Service revenue	200
4492 VAT payable	42
2410 Trade receivables		242

Revenue falls, the VAT owed to the state falls, and the customer's debt falls by the gross amount. Compare it with the original sales entry in accounts receivable — the same three accounts, opposite sides.

Note that the VAT reduction happens here, through a document, not by adjusting a filed return. That is why the credit note matters for tax and not just for the customer relationship.

Worked examples

Return of goods. A customer returns 3 of 10 items invoiced at 100 € each. Credit note for 300 € net, 63 € VAT, 363 € gross. If the goods physically return to stock, the inventory movement is separate — the cost of those 3 items comes back into inventory and out of cost of sales, which restores the gross profit to what it should have been.

Wrong price. Invoiced at 120 €/unit for 50 units, agreed price was 100 €. Credit the difference only: 20 × 50 = 1,000 € net plus VAT. Do not credit the whole invoice and reissue unless the invoice is wrong in more than the amount — a partial credit leaves a cleaner audit trail than a cancel-and-rebill.

Full cancellation. The supply never happened. Credit the invoice in full, referencing it, and the receivable returns to zero.

Error in the customer's favour discovered late. Same treatment regardless of when it is found — the credit note is dated when it is issued, and lands in that period's VAT return.

What a credit note is not for

• An invoice that was too low. That needs a second invoice for the difference, not a credit note — you are increasing the claim, not reducing it.
• A customer who simply won't pay. That is bad debt, and it is a different mechanism with different VAT conditions. Issuing a credit note to clear an unpaid invoice is a common and expensive mistake: it cancels revenue that was genuinely earned, and it hands back VAT you may not be entitled to reclaim that way. The debt was real; the customer's failure to pay doesn't make the sale disappear.

The legal side

Under EU VAT rules, a document that amends an original invoice is itself treated as an invoice (Directive 2006/112/EC, Article 219). Practically, that means a credit note must:

• carry its own sequential number, usually in a dedicated series;
• reference the original invoice unambiguously — number and date;
• show the same particulars as an invoice: parties, VAT numbers, the amount credited per VAT rate, and the VAT amount;
• state the reason for the correction, which several member states require explicitly.

Member states differ on the finer conditions — particularly on when the supplier may reduce output VAT and whether the customer must acknowledge the correction. The list of mandatory particulars is in invoice required fields.

How Nordlet handles it

A credit note is a sale invoice with type: 'credit_note', created through POST /v1/sales/invoices/create with creditedInvoiceId pointing at the original. That link is enforced — creditedInvoiceId is only accepted on credit notes — so the audit trail from correction back to original is structural rather than a note in a description field.

On issue, a credit note behaves like a full document: it takes a number from its own series, posts reversing ledger entries, reduces the receivable and the VAT liability, and appears in the VAT return and the Lithuanian i.SAF registers with the correct sign. It flows through the same channels as an invoice — PDF, email, Peppol (as a UBL CreditNote with type code 381) and the national e-invoicing gateways.

Because the ledger is append-only with period locks, the original invoice is never touched: a customer's history shows the invoice, the credit note, and the resulting balance. If the original sits in a locked period, the credit note simply lands in the open one — the correction is dated when it happened, which is the honest treatment.

For intercompany trade, an issued credit note also mirrors automatically into the counterparty company as a draft purchase credit note, keeping both sides of a group consistent.

FAQ

What is the difference between a credit note and a refund?

A credit note is a document that reduces what the customer owes; a refund is the actual movement of money back to them. A credit note may be settled by a refund, or by offsetting it against the next invoice — the two are separate steps, and the credit note comes first.

Can I just delete or edit an incorrect invoice instead?

Not once it has been issued. The customer holds a copy, the number belongs to a legally required sequence, and the amounts have been reported. Editing it breaks the audit trail and puts your books out of step with filed returns. Issue a credit note.

Does a credit note reduce VAT?

Yes — that is much of its purpose. It reduces the output VAT you owe, in the period the credit note is issued. National rules add conditions in some cases, particularly around corrections relating to non-payment.

Can a credit note be issued for more than the original invoice?

No. A credit note corrects a specific invoice and cannot exceed it. If a customer is owed more than one invoice's value, credit each invoice separately or handle the balance as a separate commercial arrangement.

Should I use a credit note for an unpaid invoice?

No. Non-payment is not a reason to cancel a sale that genuinely happened. Use a doubtful-debt provision and, if the debt becomes irrecoverable, the bad-debt process — which has its own conditions for recovering the VAT.