Credit notes are things that happen if you want to change an invoice that you’ve issued. In Xero, however, you can edit/delete/void where appropriate. So you:
- Edit/delete the invoice if it hasn’t been approved.
- Void the invoice if it’s already been approved but you want to “cancel” it.
Once you’ve approved and sent off your invoice, the “correct” way to deal with it accounting wise is to create a credit note. A credit note essentially modifies your original invoice. Examples of when a credit note could be used is:
- Issued your customer an invoice but then realised the amount was billed incorrectly so you’re reducing the amount originally invoice.
- Issued your customer an invoice but negotiated terms means that you’ll need to cancel the invoice. You could use a credit note to reduce the invoice to zero.
- Issued your customer an invoice and they paid it and you now want to give them a refund. Issue a credit note for the full invoice amount and then refund the payment.
Here’s how to create a credit note in Xero:
- Go to Accounts > Sales > See All and click on the invoice you want to create a credit note for.
- Click “Invoice Options” in the top right corner and click “Add Credit Note”. Fill in the details of your credit note, you can reduce a portion of the amount of the invoice of even the whole amount. Once you’ve put in all your credit note details…
- Click “Save” - now your credit note and been applied to your invoice.
You can also raise a credit note where no invoice exists. A situation when this would happen would be where your customer returns a shirt they purchased from you. Instead of giving them a refund, you might provide them with a credit note so that they can use it for other purchases (and when they do make another purchase e.g. $50 and their credit note is for $50, they don’t have to pay anything).
To do this:
- Go to Accounts > Sales > click the upside down arrow next to the “+ New” button and choose “Credit Note”
- Fill in the details for your credit note. The values that you enter will be positive numbers and that’s ok (that’s just how the credit note works). Also you should include detail about why the credit note is being issued for record keeping purposes.
- Once you’re done click “Save” or “Approve” the credit note.
- When an invoice is created down the track for a customer’s purchase, you can allocate the credit note directly to that invoice to reduce its balance. Just fill in the details of the pop up and then click “Allocate Credit”.
- You’ll see that your invoice has now been reduced by the credit amount.