How to Enter a Credit Memo in Xero

Entering a credit memo in Xero is how you record a refund, a discount after the invoice, or a correction to an invoice you’ve already sent. It reduces the amount your customer owes you. This guide walks you through creating a credit note, applying it to an invoice or leaving it as a customer credit, and avoiding common pitfalls.

What You’ll Need

• Xero login with Adviser or Standard user role (or equivalent permissions to create sales invoices).
• The customer’s name or email address already in Xero.
• The invoice number (if you plan to apply the credit to a specific invoice).
• Details of the items or services being credited, including quantities and amounts.

Step-by-Step

1. Log in to Xero and go to the Business menu. Select Sales and then Invoices.
2. Click the New Invoice button (blue, top right). From the dropdown, choose Credit Note.
3. In the Contact field, select the customer. If the customer is new, click New contact and fill in their details.
4. Set the Date to the date you want the credit to be effective (usually today or the date of the refund).
5. Enter the Reference (optional) – e.g., the original invoice number or a reason like “Refund for damaged goods”.
6. In the line items table, click Add an item. Choose the item or account you are crediting. Enter the Quantity (often negative, but Xero handles this automatically) and the Unit Price (positive). The line total will show as a negative amount.
7. If you need to add multiple lines, repeat the previous step.
8. Check the Total at the bottom – it should be a negative number (e.g., -150.00).
9. Click Save (top right). Xero will create the credit note with a number like CN-0001.
10. Now decide how to use the credit:
    • Apply to an invoice: Click Apply to invoice (or Allocate credit). Select the invoice you want to reduce, enter the amount to apply, and click Apply.
    • Leave as a customer credit: If you don’t apply it immediately, it stays as a credit on the customer’s account. You can apply it later.
11. Click Approve (if required by your settings) and then Post to finalize. The credit note is now recorded.

Common Mistakes

• Entering positive amounts: A credit note must have negative totals. If you enter positive quantities and prices, the total will be positive, and Xero will treat it as an invoice, not a credit.
• Applying to the wrong invoice: Double-check the invoice number before applying. Applying to the wrong invoice can cause confusion in accounts receivable.
• Forgetting to allocate: If you leave the credit unallocated, it sits as a credit on the customer’s account. That’s fine, but make sure you know why it’s there.
• Creating a credit note instead of a refund: If you’ve already received payment and want to give money back, a credit note is still the right document, but you also need to process the refund (via bank transfer, etc.) and record it separately.

Tips

• Use a consistent Reference format, like “Refund for invoice INV-001” – it helps when reconciling.
• If you have many line items, consider using the Copy function from the original invoice to avoid retyping.
• Set up default Credit Note numbering in Settings → Invoice Settings to keep it clean.
• If you’re crediting a partial amount, you can apply only part of the credit to an invoice and leave the rest for later.
• Regularly review Accounts Receivable aging to spot unallocated credits that need attention.

Troubleshooting

• Credit note total is positive: You likely entered positive amounts. Go back and edit the quantity or unit price to be negative (or use the “Credit” button if available).
• Cannot find the credit note later: Check the Sales → Invoices screen and filter by status “Approved” or “Paid” – credit notes appear there. You can also search by the credit note number.
• Customer shows a negative balance: That means you have an unallocated credit. Apply it to an invoice or issue a refund.
• Credit note is locked/editing is disabled: If it’s been approved and posted, you may need to reverse it and create a new one. You can do this by clicking the credit note and selecting Reverse (if available) or by creating a new credit note with opposite amounts.
• Applied credit doesn’t reduce the invoice: Make sure you clicked Apply after selecting the invoice. If you just saved the credit note, it hasn’t been allocated.

Frequently Asked Questions

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