How to legally change an invoice with a credit note
No matter how careful you are when invoicing, mistakes can happen. A customer’s address may be typed wrongly, a discount may not have been applied, or the items themselves may be incorrect. Once sent, you can no longer edit the invoice directly, and a credit note must be issued instead.
If you need to change an invoice, this needs to be done correctly and according to UK law. This article explains how to correctly and legally change an invoice with a credit note, and offers free credit note templates in Word, Excel, and PDF format.
What is a credit note?
A credit note, also called a credit memo, is a legal document that is issued by a seller to a buyer. It indicates that the seller is to return funds to the buyer or cancel what is owed. Most commonly, credit notes are issued to cancel a customers’ debts, reimburse customers when incorrect or damaged products are delivered, or rectify sellers’ invoicing errors.
What is the purpose of a credit note?
Credit notes are used in accounting to legally document refunds or cancellations. They are used as evidence of the seller’s reduction in sales or the buyer’s reduction in what is owed. An invoice is used to document what a buyer owes and it should never be deleted after it has been sent to the customer. Instead, a credit note should be issued to cancel part or all of the invoice or to indicate a refund is owed.
Within a business, credit notes perform two functions:
They can cancel outgoing payments
They can cancel incoming payments
Practically, this means that a business can receive a credit note from their supplier, or issue a credit note to their own customers.
Credit notes can cancel incorrect invoices
Invoices are legally binding accounting documents. If you need to change an invoice, this needs to be done correctly and according to UK law. If a business makes a mistake on an invoice they have already sent to their customer, they must cancel the invoice with a credit note and then issue a new invoice.
The credit note essentially ‘pays’ the incorrect invoice so there is no outstanding payment. The business would then process the credit note as if it were a payment for the invoice, balancing their books and sending it to the customer so they know their debt has been cancelled.
Once the incorrect invoice is cancelled with a credit note, the business can then invoice the customer again with the correct information.
Credit notes can be used for refunds
If a refund is necessary, a credit note can document that money was returned. For example, you may receive goods from a supplier that have been damaged, are faulty, or otherwise incorrect. A credit note can then be issued to show that a refund has taken place. Equally, as a business, you may issue a credit note if a customer returns a product and their money is refunded.
In these instances, money is either refunded, or the customer’s account is credited with the amount specified in the credit note and can be used as payment towards future purchases.
If you are only refunding a portion of the total sale amount, the credit note can be edited to show only the refunded portion of the invoice.
Credit notes can cancel payments that are due
Even if money has not been exchanged, a credit note may be needed to cancel out *what is owed* and balance the books.
Before payment, a customer may change their mind about their order and wish to cancel. Equally, a business may not be able to supply the goods and cancel the transaction before a customer’s payment is made. In either case, a credit note must be sent to the customer, informing them that they don't owe any money.
If only one of the multiple items on an invoice needs to be cancelled, a partial credit note can be issued.
What is the difference between a credit note and an invoice?
Credit notes and invoices are legal documents that go hand-in-hand in business accounting. Invoices are issued to show that payment is owed, whereas credit notes are issued to cancel the invoice or show a return of money.
In accounting, invoices show a positive amount coming into your business, while a credit note shows a negative outgoing amount of money. This way, you have a positive and negative transaction that will cancel each other out.
Credit note format
Just like an invoice, a credit note must contain specific information to be legal. These documents look very similar but have opposite functions. In the UK, credit notes are required to include the following information:
Your name/business name and address
The customer’s name/business name and address
A unique identification number
The credit note issue date
The original invoice number
The original invoice date
The total amount being credited
The reason the credit note was issued
Credit notes require their own unique identification number. The numbers can either follow in the same sequence as the invoice numbers, or you can use a separate sequence strictly for credit notes.
Using a credit note template
Using a credit note template to create your credit notes will help to minimise the risk of mistakes. Invoicing software usually provides online credit note templates. You can simply fill in the blank fields and your credit note is automatically generated.
Below, you can download our free credit note templates in Word, Excel, or PDF formats. If you’re not a frequent user of invoicing software, saving a blank template to your computer will ensure you don’t miss any important fields. We also provide free, downloadable invoice templates for Word and Excel.
Credit note template for Word
It’s very easy to edit the design or adjust the layout of a credit note template in Word. The templates provide a lot of flexibility for you to adjust according to your needs. Its intuitive interface means it’s easy to add additional information or pictures if necessary.
Credit note template for Excel
Using an Excel credit note template will allow you to work with more complex functions than Word. Excel will be able to calculate your prices for you and it provides more possibilities for automatisation which will simplify your work. However, this can make it more complicated than Word for novice users.
This free document includes a tab for VAT credit notes and another for non-VAT credit notes.
Credit note templates in PDF format
If you would rather handwrite your credit notes, you can download a credit note template below in PDF format. The PDF cannot be edited and therefore offers limited possibilities.
Using invoicing software to change or cancel an invoice
Invoicing software is designed to help businesses issue invoices more efficiently. But it can also help you change or cancel invoices with credit notes.
SumUp Invoices is invoicing software that helps you create professional, legally compliant invoices and credit notes. The software is simple and intuitive with premade templates. You simply need to enter the customer and product/service details, and the system will do the rest.