How to Create a Credit Note in Xero


Welcome to the Fit Small Business Xero training course In this lesson, we're going to cover how to create a credit note in Xero

To follow along with me, login to your Xero account now or click the link below this video for a free 30-day trial of Xero You can also click this link to access our full Xero course and other helpful resources Let's get started A credit note can be used to reduce the amount that a customer owes you, also known as accounts receivable, or the amount that you owe to a supplier, known as accounts payable Some common scenarios that will require you to create a credit note are: you issued an invoice to a customer and the customer noticed a mistake before making the payment; you issued an invoice and received payment from a customer, later on the customer returned some or all of the products that were purchased and paid for; you issued an invoice and then later decided to apply a discount to the invoice; or you issued an invoice and the customer has overpaid you

Click the link below to read more about these scenarios or keep watching to learn how to issue a credit note There are three ways to create a credit note in Xero First, you can add a credit note directly to an existing invoice or bill Go with this option if you know which invoice or bill that you want to allocate the credit note to Option number two, add a credit note to a customer or a supplier account select this option if you want to just put a credit on your customer or supplier's account to be used at a later date

And finally, you can copy an existing credit note If you previously created a credit note for similar items, you can simply copy the existing credit note which will save you a few minutes of data entry We will cover each of these next To add a credit note to an existing invoice or bill, navigate to the accounts section And for invoices you're going to select sales, for bills you would select purchases

So let's click on sales Then you want to go ahead and click on the awaiting payments option to locate an invoice that has not been paid So we'll click on that And this displays a list of unpaid customer invoices and/or outstanding prepayments or credits So let's go ahead and click on the row for the invoice that we want to go ahead and create a credit note for

Once you do that the details of the invoice will display here In the upper right hand corner you want to click on the invoice options button, and go down and select add credit note The new credit note will display on the screen and to save you time, Xero has copied all of the information that appeared on the customer's invoice to this credit note template If you plan to issue a credit for the entire invoice and you don't want to make any changes, then all you have to do is scroll down and simply save or approve the credit note However, if you only want to issue partial credit, then you want to make the necessary changes here in the body of the credit note to reflect the products and services that you would like to issue a credit for

And then go ahead and save or approve the invoice Let's talk about a few of these fields The credit note number is a unique number issued by Xero to keep track of all credit notes issued In the How to Set Up Invoices lesson, we discussed how the numbering sequence works Please note that I recommend that you do not make any changes to this number to avoid using a duplicate number

You can click this link to learn more about setting up invoices Down here below the total line you'll see a line that says less credit to, and then there's a link to an invoice This actually reflects the invoice that the credit note will be applied to Save: similar to invoices you have the same options available when saving a credit note Save as draft will save your credit note and allow you to close out of this screen

Save and continue editing will allow you to save your credit note before you are done with it You can say periodically so that you don't lose any information as you are completing the credit note And finally save and submit for approval This will allow you to save your credit note and submit it for approval if you do not have approval authority Once the credit note has been approved, you can email it to your customer

So again if you've got approval authority you've got the green button here you can just click approve And so we'll go ahead and approve this credit note since we have that authority You should see a notification up here at the top that the credit note was approved And as you can see the updated invoice now is displayed Down here at the bottom you will see the reduction of the credit note that we just created

And so now the total amount due for this invoice is 0 Please also note up here at the top the status of the invoice has been changed to paid as indicated here If you scroll down to the very bottom of the invoice you will see a section called history and notes In this section you will see the person that actually created the credit note, along with the day and time it was created and the amount Now let's walk through the steps to add a credit note to a customer or supplier's account

So the first thing we want to do up here at the top is go back to our sales section and click on the plus new button sign here, and go ahead and select credit note So since we did not create this credit note for a specific invoice or bill but instead we want to add it to a customer or supplier's account, Xero is not able to auto populate the fields as it did in the previous section So what we'll do is we'll go ahead and complete each of these fields together to create our credit note So starting with the To field So from the drop-down we could easily select a customer that we want to create the credit note for

In the date field you want to just enter the date that you'd like the credit note to reflect As we mentioned previously the credit note number is automatically issued by Xero and should not be changed The reference field is an optional field and can be used to provide additional information about the credit note Branding theme: the branding theme that you select during the invoice setup will automatically populate in this field You can click here to access this lesson

In the item field you can select the item that you'd like to issue the credit note for from the drop-down Once you do that as you can see the remaining fields here will automatically populate, and you can change them as you need to So in the description field we have typed a custom description to explain the purpose of the credit note here In the quantity column you want to enter the correct quantity for the items that you are issuing a credit for For services you can just enter a quantity of 1

The unit price will automatically populate here based on what was set up for the item If you need to credit a different amount then go ahead and type directly in this field the amount that you would actually like to create the credit note for Account: from the drop-down you want to go ahead and select the account that you would like to use to track this credit In the How to Set Up Accounts lesson we show you how to set up accounts You can click here to access this lesson

Generally you should select the same account that you coded the original product or service to Tax rate: this should default to the sales tax rate that you have set up You can click here to access the sales tax lesson However, if you did not charge sales tax or if it differs from the default, you can select the correct sales tax rate from the drop down Region: region is a tracking category

Xero allows you to set up tracking categories to see how different areas of your business is performing For example departments, locations, or in this example here regions So from the drop-down you simply want to select the appropriate tracking category that you would like to use for this credit And then finally the amount field: Xero will multiply the quantity column by the unit price column to automatically calculate the amount field Please note once you have entered all of the information, be sure to save or approve the credit note

Once the credit note has been approved, you can email it to your customer So we'll go ahead and approve this credit note And then as you'll see here so it says credit note has been approved here And then what you also notice is Xero has automatically provided us with a couple of outstanding invoices for this particular customer So at this point we could actually allocate this credit to an invoice, and if we're not interested in doing that we can just click cancel here

So we'll go ahead and do that And so now that the credit note has been approved and it's in an awaiting payment status, we can actually email this to our customer by clicking the email button here and following the on-screen prompts So let's go ahead and walk through how to copy an existing credit note And so what we'll do here is we'll stay in this screen where we have our credit note that we just created, and then we'll go ahead and click on this credit note options button here You can simply select the copy option here and the new credit note will display

All the information from the credit note that we copied has already been populated here, and you can make any necessary changes that you need to, and then save the credit note You can easily allocate, edit, void, or delete a credit note in Xero You want to head back to the cells section by clicking on accounts and then sales, and then let's go ahead and go back to our awaiting payments category here To select a credit note you can simply click on the customer contacts name here to display the credit note And then go ahead and click on the credit note options button up here in the right-hand corner

And let's chat about our options here The first one is allocate credit So to apply an open credit to a customer invoice, you can simply click on this allocate credit option and select the invoice that you would like to allocate the credit to Please note if you do not have any outstanding invoices for a customer you will not see this as an option available However, the next time you create an invoice for a customer who has an open credit note, Xero will give you the option to allocate the credit to the invoices as we just saw a few minutes ago

Void: you will need to avoid a credit note that is either awaiting payment or in a paid status However, if a credit note is in a draft or awaiting approval status, you can delete it instead Please note the delete option will appear here in this drop down for credit notes that can be deleted So as you notice we do not have the option to delete so therefore this credit note cannot be deleted But we can void it since we've got that option here

And then finally edit: select the edit button to make any necessary changes that you would like to make to your credit note and then just save those changes after you make them That wraps up the lesson on how to create a credit note in Xero To access our full Xero course or any of the other lessons in this series, click this link You can also find a link below this video for a free 30-day trial of Xero If you have feedback about this course or if you have any questions please leave a comment below

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