What Is a Credit Note?
A credit note is an official commercial document issued by a seller to a buyer to notify them of a reduction in the value of a previous invoice — or its full cancellation. It works like a “reverse invoice,” creating the buyer’s right to recover an amount or reduce what they owe.
A credit note differs from a debit note: the debit note increases the amount due, while the credit note reduces it or cancels it.
Reasons for Issuing a Credit Note
- Goods return: the buyer returned defective or non-conforming products.
- Trade discount: a discount granted but not included in the original invoice.
- Invoice error: correcting a wrong price or quantity on the original invoice.
- Order cancellation: the buyer cancelled the order after the invoice was issued.
- Contract amendment: an agreed change in price or quantity after invoicing.
Why Credit Notes Matter
From an accounting standpoint, the credit note is essential for correcting figures without deleting the original invoice (which must be preserved for audit purposes). Under Saudi VAT, a credit note adjusts the VAT due in line with ZATCA’s requirements — the original invoice cannot simply be voided.
Accounting impact:
- In the seller’s books: reduces revenue and amounts due from the customer.
- In the buyer’s books: reduces the expense or inventory, and the amount due to the supplier.
Worked Example
A furniture company issued an invoice for SAR 50,000 + SAR 7,500 VAT = SAR 57,500 total. The buyer returned items worth SAR 10,000 due to a manufacturing defect. The seller issues a credit note for SAR 10,000 + SAR 1,500 VAT = SAR 11,500. The net amount payable becomes SAR 57,500 – SAR 11,500 = SAR 46,000. Both documents (invoice and credit note) are submitted to ZATCA in the periodic return.
Effect on Customer Balance
When a SAR 5,000 credit note is issued to a customer, both parties’ books are affected: in the seller’s books, the customer balance and revenue are reduced by SAR 5,000. In the buyer’s books, the payable balance and either inventory or expense are reduced by SAR 5,000. This symmetry is essential to keep the two ledgers reconciled.
Credit Notes and VAT
A credit note adjusts or cancels the VAT on the original invoice. The adjusted VAT must be shown on the credit note, along with a reference to the original invoice number and date. Qoyod handles credit notes and VAT adjustments automatically, posting them in the periodic VAT return without manual intervention.