What is a credit note?
Published
A credit note is a statutory document the seller issues to reduce the value of a previously issued invoice - fully or partly - with the tax adjusted accordingly. It is the only legitimate tool for correcting an issued invoice downward; the invoice itself is never edited or deleted, and the note is subject to e-invoicing rules just as the invoice is.
When it issues
- A goods return, full or partial.
- A post-invoice discount (settlement, compensation for delay or defect).
- An invoice error that overstated price or quantity.
- A cancelled supply that was invoiced but never delivered.
It must carry the original invoice's reference - a note without one is a broken link in the audit trail.
A full example: a return against Al-Waha's invoice
From the SAR 34,500 invoice (20 chairs, 2 tables), the customer returns 5 chairs for a manufacturing defect. Chair price: SAR 1,200.
Return value (net) = 5 × 1,200 = SAR 6,000Its VAT = SAR 900Credit note total = SAR 6,900
The seller's entry (Al-Waha):
| Account | Debit | Credit |
|---|---|---|
| Sales returns | 6,000 | |
| Output VAT | 900 | |
| Accounts receivable | 6,900 |
And as the goods re-enter stock (if saleable): inventory 4,350 / cost of sales 4,350 (5 × 870 unit cost). If damaged, they go to shrinkage, not inventory.
The tax effect: output VAT falls by SAR 900 in the note's period - one of the "legitimate" reconciliation differences listed on the VAT return page.
On the buyer's side the effect mirrors: payables and input VAT reduce - see the debit note page for the buyer-originated document.
Common mistakes
| Mistake | Why it's wrong |
|---|---|
| Deleting the invoice instead of issuing a note | Breaks the sequence and audit trail; an explicit violation |
| A note with no invoice reference | Nobody knows what it corrects; rejected logically and by rule |
| Reducing revenue without adjusting the tax | Output VAT declared above reality |
| Netting returns straight off sales | Hides the returns volume; a separate returns account turns it into a readable signal |
Frequently asked questions
Does a credit note need the customer's approval?
In practice it issues by agreement or in response to the customer's right (an accepted return), and the customer is notified because it changes their balance and their input VAT.
The customer paid in full, then the note issued?
The note becomes a credit balance for the customer: offset against their next invoices or refunded, per agreement.
Do credit notes have their own numbering?
Yes - a numbered series under the same sequencing controls, linked to the original invoice reference.