Credit note vs. debit note: key differences, examples, and when to use each

A credit note and a debit note are both used to document adjustments to business transactions. However, they do not always serve the same purpose. A credit note generally records a reduction in the amount a customer owes, while a debit note can document an increase in a customer balance or a buyer's claim against a supplier.

The difference depends partly on who issues the document and why.

For businesses that buy and sell goods or services on credit, understanding these documents helps prevent billing disputes, keep accounts accurate, and maintain a clear record of changes to an invoice.

What is a credit note?

A credit note, commonly called a credit memo or credit memorandum in many US accounting workflows, is a document a seller issues to a customer to reduce all or part of an amount previously invoiced.

It records that the customer no longer owes the full amount shown on the original invoice. The adjustment may be necessary because of returned goods, an overcharge, a pricing error, a canceled service, or an agreed discount after invoicing.

For example, a supplier sends a customer an invoice for $1,500. After the invoice is issued, the customer returns products worth $200. The supplier can issue a credit note for $200 to document the reduction.

If the original invoice has not been paid, the outstanding amount becomes $1,300, assuming there are no other adjustments.

A credit note does not automatically mean that the seller has returned cash to the customer. It may reduce an unpaid balance or create a credit that can be applied to a future transaction. A separate refund may be needed if the customer has already paid and the seller agrees to return the money.

What is a debit note?

A debit note is a document used to record or communicate an adjustment that increases an amount due or identifies an amount a buyer believes should be deducted from a supplier's bill.

The term has two common business uses. Understanding who issues the document is essential because the two uses have different purposes.

1. A seller issues a debit memo to increase the amount due

A seller may issue a debit memo when the original invoice understated the amount the customer owes. This can happen when a charge was missed, the quantity was recorded incorrectly, or an agreed additional charge needs to be documented.

For example, a supplier invoices a customer $1,500 but accidentally leaves out an agreed $100 delivery charge. The supplier may issue a debit memo for $100, bringing the total amount due to $1,600.

In this seller-side accounts receivable context, the debit memo increases the customer's outstanding balance. The Ohio state government's accounts receivable process manual also describes debit memos as adjustments that increase a customer balance.

2. A buyer issues a debit note to notify a supplier of a deduction or discrepancy

A buyer may issue a debit note when goods received are damaged, quantities are missing, or the supplier has charged more than agreed.

For example, a buyer receives an invoice for $2,000 but identifies $300 worth of damaged goods. The buyer may send the supplier a debit note for $300, explaining the discrepancy and requesting a corresponding credit.

In this situation, the buyer is documenting a claim or proposed deduction. The supplier may review the claim and issue a credit note if the adjustment is accepted. The buyer's debit note should not be confused with a seller-issued debit memo that increases a customer's balance.

The OASIS Universal Business Language standard recognizes credit notes and debit notes as separate business document types and describes debit notes in workflows involving discrepancies between orders, deliveries, and invoices.

Credit note and debit note examples

The following examples show how the documents may be used in everyday business transactions. The amounts are illustrative.

Example 1: A seller issues a credit note for returned goods

A wholesale supplier sends a customer an invoice for 10 units at $100 each.

• Original invoice: $1,000
• Returned goods: 2 units
• Credit amount: $200
• Remaining amount due: $800

The supplier issues a credit note for $200 and references the original invoice. The customer can use the credit note to support the reduction in the amount payable.

Example 2: A seller issues a debit memo for an omitted charge

A service provider invoices a client $2,400 for a project but accidentally leaves out an agreed $150 setup fee.

• Original invoice: $2,400
• Omitted agreed charge: $150
• Additional amount due: $150
• Revised amount due: $2,550

The service provider may issue a debit memo for the additional $150. The document explains the omitted charge and connects the adjustment to the original transaction.

Example 3: A buyer sends a debit note for damaged products

A retailer receives a shipment and finds that some of the products are damaged.

• Supplier invoice: $3,000
• Value of damaged products: $450
• Amount disputed: $450

The retailer sends the supplier a debit note documenting the damaged items and the amount being claimed. The supplier reviews the claim. If accepted, the supplier can issue a credit note for $450.

The buyer's debit note communicates the claim; it does not, by itself, guarantee that the supplier has accepted the adjustment.

When should you use a credit note?

A seller should consider issuing a credit note when an earlier invoice needs to be reduced and the transaction should remain documented.

Common situations include:

• Returned products: A customer returns some or all of the goods purchased.
• Overbilling: The seller charged more than the agreed price.
• Incorrect quantities: The invoice includes more units than were supplied.
• Canceled services: A service was canceled after it had already been invoiced.
• Agreed discounts: The seller approves a discount after sending the original invoice.
• Billing corrections: A previous invoice needs a documented reduction rather than an undocumented change.

A credit note is particularly useful when the original invoice has already been sent or recorded. It creates a separate adjustment record instead of silently changing the transaction history.

When should you use a debit note?

The correct use depends on whether the seller or buyer is issuing it.

A seller may issue a debit memo when:

• An agreed charge was left off the original invoice.
• The customer was undercharged because of a pricing or quantity error.
• An additional contractual charge needs to be documented.
• A previously invoiced amount needs to be increased.

A buyer may issue a debit note when:

• Goods arrive damaged or defective.
• The supplier delivers fewer items than ordered.
• The invoice contains an overcharge.
• The buyer is requesting an adjustment for a return or other discrepancy.

In buyer-side situations, the supplier should review the supporting information and confirm the adjustment. The document's effect on each company's accounting records depends on the transaction and the parties' accounting procedures.

Credit note vs. debit note vs. refund

These terms are related, but they are not interchangeable.

Document or transaction	What it does
Credit note	Documents a reduction in an amount previously invoiced
Debit note	Documents an additional amount due or a buyer's claim for a deduction, depending on who issues it
Refund	Returns money to a customer who has already paid

For example, if a customer has paid $1,000 and the seller approves a $200 reduction, the seller may issue a credit note for $200. The seller may then refund $200 or leave the amount as a credit for a future purchase, depending on the agreement.

The credit note documents the adjustment. The refund is the movement of money.

What information should a credit note or debit note include?

The exact fields depend on the document's purpose, the parties' processes, and applicable requirements. A well-prepared document will generally make the adjustment easy to identify and verify.

Consider including:

1. Document number: A unique credit note or debit note reference.
2. Issue date: The date the adjustment document was created.
3. Business details: The name and contact details of the issuing business.
4. Customer or supplier details: The other party's name and relevant business information.
5. Original invoice reference: The invoice number or transaction being adjusted, where applicable.
6. Description of the adjustment: The products, services, quantities, or charges involved.
7. Adjustment amount: The value being credited or debited.
8. Tax details: Any applicable tax adjustment, handled according to the relevant rules.
9. Reason for the adjustment: A brief explanation, such as returned goods, an overcharge, or an omitted fee.
10. Supporting information: Relevant order, delivery, return, or approval references where needed.

Keep the original invoice and adjustment document together in your records. This makes it easier for both parties to understand why the balance changed.

How to create a credit note

If you need to document a reduction to a customer's invoice, you can use the free Credit Note Generator.

The generator lets you:

1. Add your business name, address, and logo.
2. Enter the customer's details.
3. Add a credit note number, issue date, and currency.
4. Add the products or services being credited, including quantities and rates.
5. Apply a line discount or overall tax where applicable.
6. Enter the original invoice reference and reason in the notes field.
7. Review the credit note preview, select a template, and download the PDF.

You can create and download the credit note without registering for an account.

The generator creates credit notes. It does not currently generate debit memos, so a debit memo or buyer-issued debit note should be prepared through an appropriate separate process.

Frequently asked questions

Is a credit note the same as a debit note?

No. A credit note generally records a reduction in the amount a customer owes. A debit note can record an increase in the amount due when issued by a seller, or a buyer's claim for a deduction from a supplier.

Who issues a credit note?

A seller typically issues a credit note to a customer when an earlier invoice needs to be reduced because of a return, overcharge, cancellation, or agreed adjustment.

Can a buyer issue a debit note?

Yes. A buyer may issue a debit note to notify a supplier about returned goods, damaged products, shortages, or an overcharge. The supplier can review the claim and issue a credit note if the adjustment is accepted.

Does a debit note always increase the amount a customer owes?

No. A seller-issued debit memo can increase a customer's balance. However, a buyer-issued debit note may document a claim or deduction against a supplier. The issuer and transaction context determine its purpose.

Is a credit note the same as a refund?

No. A credit note documents a reduction or credit against an earlier transaction. A refund returns money to the customer. A credit note may be issued without an immediate cash refund.

Should a credit note refer to the original invoice?

Where the credit note adjusts a specific invoice, referencing that invoice is a useful way to maintain a clear record. Include the original invoice number and enough detail to identify the transaction.

Can a debit note replace an invoice?

Not in every situation. A debit memo may document an additional charge against an earlier invoice, but the appropriate document depends on the transaction, the agreement between the parties, and the accounting process being followed.

Are credit notes and debit notes subject to tax rules?

The tax treatment of an adjustment depends on the applicable jurisdiction and the nature of the transaction. Businesses should check the relevant state, local, or other tax requirements before changing tax amounts or records.

Final thoughts

Credit notes and debit notes help businesses document changes to invoices, but the issuer and purpose matter. A seller-issued credit note reduces a customer's balance. A seller-issued debit memo can increase it. A buyer-issued debit note may instead communicate a claim against a supplier for returned goods, shortages, or billing errors.

Before recording either document, identify the original transaction, explain the reason for the adjustment, and confirm how the other party should reflect it in their records. This keeps billing adjustments clear and helps both businesses maintain accurate transaction histories.

Sources and further reading

• Ohio OAKS Finance Process Manual: Creating Debit and Credit Memos
• AccountingCoach: What Is a Credit Memo?
• OASIS Universal Business Language (UBL) 2.1