How to Add a Credit Note in Xero

You sent an invoice. The client overpaid. Or maybe you invoiced the wrong amount. Or a product got returned. Now what?

That’s where a credit note in Xero comes in — and if you’ve never done it before, it sounds more complicated than it is.

This guide breaks down the entire process in plain language. No accounting degree required. Whether you’re handling sales credit notes, supplier credit notes, or just trying to fix a billing mistake, you’ll know exactly what to do by the end of this page.

Let’s get into it.

What Is a Credit Note in Xero?

A credit note is essentially the reverse of an invoice. It’s a document that reduces the amount a customer owes you — or that you owe a supplier.

Think of it as an “undo” button for an invoice that’s already been sent.

You’ll use credit notes when:

• A customer returns a product and deserves a refund
• You overcharged a client and need to correct it
• A service wasn’t delivered or was only partially delivered
• A discount was missed when the original invoice was issued

According to a study by Atradius, 50% of B2B invoices in the US are paid late, and billing disputes are one of the top causes of delayed payments. A clean, properly issued credit note keeps those disputes from turning into bad debt.

Xero makes the process straightforward — once you know where to look.

Two Types of Credit Notes in Xero

Before you touch anything in Xero, know which type of credit note you need:

Sales Credit Note — You’re crediting a customer. This reduces what they owe you or triggers a refund.

Purchase (Supplier) Credit Note — A supplier is crediting you. This reduces what you owe them.

Both follow a similar process in Xero, but they live in different parts of the platform. We’ll cover both.

How to Add a Sales Credit Note in Xero

This is the most common scenario — you need to credit a customer.

Go to the Accounts Receivable Section

Log into your Xero account. From the main menu, click Accounts → Sales → Credit Notes.

Alternatively, you can navigate directly from an existing invoice. Open the invoice you need to credit, and Xero gives you the option to add a credit note right from that invoice screen. This is often the fastest route.

Click “New Credit Note”

Hit the New Credit Note button in the top right corner. A blank credit note form will open.

Fill in the Credit Note Details

Here’s what you’ll need to complete:

• To: The customer’s name — start typing and Xero will auto-suggest
• Date: The date the credit note is being issued (not the original invoice date)
• Credit Note Number: Xero auto-generates this, but you can customize it
• Reference: Optional, but useful for internal tracking
• Currency: Defaults to the customer’s currency

Add the Line Items

Add the products or services being credited. You’ll need:

• Item (if you use inventory items in Xero)
• Description of what’s being credited
• Quantity
• Unit Price
• Account code (same as the original invoice, typically)
• Tax rate

Pro tip: If you’re crediting an entire invoice, you don’t have to re-enter everything manually. Open the original invoice → select Add Credit Note → Xero pre-fills the line items for you. You just review and approve.

Review the Tax and Total

Xero automatically calculates tax based on the rates you’ve set. Double-check that the credit note total matches what you intend to credit. A $500 credit note on a $500 invoice wipes it clean. A partial credit note reduces the balance.

Approve the Credit Note

Once everything looks right, click Approve. The credit note is now active in Xero.

At this point, it’s sitting as an unapplied credit. It’s not yet linked to the invoice it’s meant to address.

How to Allocate (Apply) a Sales Credit Note

Approving a credit note is step one. Allocating it is step two — and this is where most beginners get stuck.

Option A: Apply the Credit Note to an Invoice

Open the approved credit note. At the bottom of the page, you’ll see an Allocate Credit section. Click into it.

Xero will show you a list of outstanding invoices for that customer. Select the invoice you want to apply the credit to, enter the amount, and click Add.

The invoice balance is now reduced by the credit note amount.

Option B: Refund the Credit Note

If the customer deserves actual money back (not just a reduction of a future invoice), you’ll process a refund instead.

From the approved credit note, click Refund → enter the payment account the money is going out from → confirm the refund date and amount → save.

This creates a payment record in Xero and reconciles cleanly against your bank account when you do your next bank reconciliation.

Option C: Leave It as a Credit

If the customer is going to make another purchase soon, you can leave the credit note unapplied and allocate it later. The credit stays on their account until it’s used.

Xero research shows that businesses using cloud accounting software like Xero save an average of 5+ hours per week on manual financial admin — and that includes faster resolution of billing disputes through features like credit notes.

How to Add a Purchase (Supplier) Credit Note in Xero

When a supplier owes you a credit — say you returned goods or were overcharged — here’s how to log it.

Navigate to Accounts Payable

From the main menu: Accounts → Purchases → Credit Notes.

Click New Credit Note.

Fill in the Supplier Details

The process mirrors the sales credit note:

• From: Your supplier’s name
• Date: Date the supplier issued the credit
• Reference: Supplier’s credit note reference number (useful for matching documents)
• Line items: What’s being credited and for how much

Approve and Allocate

Same logic applies. Once approved, you’ll allocate the credit to an outstanding bill from that supplier, or hold it as a credit on their account.

To allocate: open the credit note → scroll to the Allocate Credit section → select the bill → apply the amount.

How to Void or Delete a Credit Note in Xero

Made a mistake? You have two options:

Void: Cancels the credit note but keeps a record in your Xero audit trail. This is the recommended option. Open the credit note → click Options → select Void.

Delete: Permanently removes the credit note. Only available if the credit note hasn’t been approved yet. Once approved, you can only void, not delete.

Voided credit notes are visible in your reports with a “Voided” status so your records stay clean and auditable.

How Credit Notes Affect Your Xero Reports

This is something most people don’t think about until it’s too late.

When you create and approve a credit note in Xero, it affects several reports:

• Profit & Loss: Revenue decreases by the credited amount (for sales credit notes)
• Accounts Receivable Aged Report: Outstanding customer balances update in real time
• GST/VAT Return: Tax adjustments are reflected automatically
• Customer Statement: The credit appears on the customer’s account history

Xero’s real-time reporting is one reason it’s become the accounting platform of choice for over 3.95 million subscribers globally, with particularly strong adoption in the UK, Australia, and New Zealand, where small business adoption rates sit above 40% of the SMB market in those regions.

Getting credit notes right keeps your reports accurate — and accurate reports mean you make better business decisions.

Common Mistakes to Avoid

Using the wrong date. Always use the date the credit is being issued, not the original invoice date. This matters for tax period reporting.

Forgetting to allocate. A credit note sitting unapplied doesn’t reduce your outstanding receivables. Always allocate it to the right invoice or issue the refund.

Wrong account code. Credit the same account that was used on the original invoice. Using a different code throws off your chart of accounts.

Crediting the wrong customer. Double-check the “To” field before approving. Once approved and allocated, reversing it takes more steps.

Not reconciling. If you processed a cash refund, make sure you match the transaction in your bank reconciliation. Unmatched payments create confusion down the line.

Research from accounting software providers consistently shows that manual data entry errors account for up to 88% of spreadsheet errors — a key reason businesses move to automated tools like Xero. But even in Xero, human input errors happen. The steps above help you avoid the most common ones.

Why Getting Your Invoicing Right Matters More Than You Think

Here’s a stat that puts this in perspective: according to a Tungsten Network report, 74% of companies say that invoice inaccuracies have a significant impact on their cash flow.

Credit notes are your correction mechanism. But the real goal is to get the billing right upfront — and to spend less time on admin so you can focus on what actually grows your business: bringing in new clients.

That’s where most businesses leave money on the table. They get better at fixing billing errors but never build a system for consistently generating new revenue in the first place.

Conclusion

Adding a credit note in Xero is a four-step process: navigate to the right section (Sales or Purchases), create and fill in the credit note details, approve it, and allocate it to the relevant invoice or process a refund.

The most common mistake people make is approving the credit note but forgetting to allocate it — leaving their accounts receivable balance looking inflated and their reports inaccurate.

Get that step right, and Xero does the rest. Your tax reports update automatically. Your customer balances adjust in real time. And your audit trail stays clean.

If you’re spending more time fixing invoicing errors than generating new ones, that’s worth looking at too. The best accounting setup in the world doesn’t grow your pipeline — a systematic outbound strategy does.

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