Credit Note
A commercial document issued by a seller to reduce the amount owed by a buyer, typically following a return, error, or overpayment.
What is Credit Note?
A credit note (or credit memo) is a formal document issued by a seller when a buyer returns goods, was overcharged, or received damaged or incorrect merchandise, effectively reducing the buyer's accounts payable and the seller's accounts receivable by the stated amount. The seller also records a reduction in revenue or an increase in sales returns, while the buyer reduces its recorded liability — all without any immediate cash transfer if offset against future invoices. Credit notes must reference the original invoice number to maintain a clear audit trail and support accurate revenue recognition reporting. They are essential for keeping accounts receivable aging schedules clean and dispute-free.
Example
A retailer returned $15,000 of defective inventory to its supplier in Q2 2024. The supplier issued a credit note for $15,000, reducing both the retailer's accounts payable balance and the supplier's accounts receivable by the same amount. No cash changed hands — the credit was applied against the next invoice.
Source: Investopedia — Credit Memorandum