Invoicing basics
Credit note vs debit note: what's the difference?
Both adjust an invoice after it's sent, in opposite directions. Here's who issues each one, how buyer and seller record them, and when to use which.
Key takeaways
- A credit note reduces the amount a buyer owes on an invoice. The seller issues it.
- A debit note increases the amount owed when a seller issues it. Buyers also send debit notes to suppliers to claim a return or a price reduction.
- Both reference the original invoice and leave it unchanged, so the record of what happened stays intact.
- Tax treatment varies by country, so check how to show tax on either note with an accountant.
A credit note reduces the amount a buyer owes on an invoice, and the seller issues it, for example after a return or an overcharge. A debit note increases the amount owed, usually when a seller undercharged. Buyers also issue debit notes to suppliers to claim a return or a price reduction. Both reference the original invoice.
Both documents exist for the same reason. Once an invoice is sent, it should generally stay as issued. Instead of editing it, you record the change on a separate document that points back to it. That keeps both sides' books consistent and leaves a clear trail.
Side-by-side comparison
| Credit note | Debit note | |
|---|---|---|
| Effect on the invoice | Lowers the amount owed | Raises the amount owed, or records a claim against it |
| Who issues it | The seller | The seller, or the buyer when claiming a return or allowance |
| Common reasons | Returns, overcharges, damaged goods, discounts agreed after invoicing | Undercharges, missed freight or fees, price corrections, returns claimed by the buyer |
| In the seller's books | Reduces sales and the receivable | Increases sales and the receivable, when the seller issues it |
| In the buyer's books | Reduces purchases and the payable | Increases the payable, or reduces it when the buyer issues one for a return |
| Also called | Credit memo | Debit memo |
What a credit note is
A credit note is the seller's way of saying "you owe us less than the invoice says." It lists what is being credited, the amount, any tax, and the number of the original invoice. Common reasons to issue one:
- Returns. A customer sends back 4 of 20 chairs from a $3,000 order. The seller issues a credit note for $600.
- Overcharges and errors. An item was billed at the wrong price, or billed twice.
- Damaged or short shipments. Goods arrived damaged, or fewer arrived than were invoiced.
- Discounts agreed after invoicing. A volume rebate, or a goodwill discount after a delay.
- Cancellations. An order was invoiced and then canceled in full.
A credit note isn't the same as a refund. It records that money is owed back. The seller can then refund that amount or deduct it from the buyer's next invoice. Say which one on the note, so the buyer knows what to expect.
What a debit note is
Debit notes cause more confusion, because the term is used in two ways. Both are common, and which one you'll meet depends on your industry and country.
When the seller issues it
The seller sends a debit note to increase what the buyer owes on an invoice already issued. Typical reasons include freight that was left off, a price that was undercharged, or extra units that were delivered and accepted. For example, a supplier who invoiced 100 units at $12.00 instead of the agreed $12.50 can issue a debit note for the $50 difference. In the US, this is often called a debit memo. Some sellers issue a new invoice for the difference instead.
When the buyer issues it
A buyer sends a debit note to a supplier to claim a reduction: goods returned, items short or damaged, or a price higher than agreed. On the buyer's side, it records that they are reducing what they owe that supplier. The supplier usually responds with a matching credit note, which confirms the adjustment in their own books.
Seeing it from both sides
Every adjustment shows up in two sets of books. Here's how the common cases look to each side:
- The seller issues a credit note: the seller's receivable goes down, and so does the buyer's payable.
- The seller issues a debit note: the seller's receivable goes up, and so does the buyer's payable.
- The buyer issues a debit note: the buyer records a lower payable, and the seller typically confirms it with a credit note.
Take the chair return from earlier. The seller's receivable for that order drops from $3,000 to $2,400. When the buyer records the same credit note, their payable to the seller drops by the same $600.
Once an adjustment is agreed, the amounts on both sides should match. If they don't, the gap usually traces back to a note that one side never received or never recorded. Comparing customer and supplier statements regularly catches this early.
Tax, numbering, and records
If the original invoice included sales tax, VAT, or GST, a credit or debit note usually adjusts that tax too, shown separately at the rate charged on the original invoice. What's required beyond that, including specific wording, time limits, and who may issue a note, varies by country and sometimes by state. Ask an accountant or your local tax authority how to handle notes for your business.
- Give each note type its own sequence, such as CN-0001 for credit notes and DN-0001 for debit notes, separate from your invoices. Our guide to invoice numbering explains why.
- Reference the original invoice by number and date on every note.
- State the reason in one short line, such as "Return of 4 chairs, order 1182."
- Never edit or delete the original invoice. The note is the correction. Keep both.
Create the right note
Use the credit note generator to reduce an invoice, and the debit note generator to add a charge or record a claim. Both are free to build and preview, and download with Pro. If you still need to bill the original sale, start with the free invoice generator.