Credit notes are used to correct or reduce the amount a customer owes. For instance, if goods were returned, prices were entered incorrectly, or a post-sale discount was offered. In Xero, you can create and apply credit notes easily to ensure your customer balances and financial reports remain accurate.

This guide covers two parts:

Step 1: From the dashboard, go to Sales, choose Invoices.

Step 2: Open the invoice that needs to be adjusted.

Step 3: Click the three dots at the top right and select create and apply credit.

Step 4: Xero will copy the main invoice details automatically. Review and update them if needed — such as quantities, prices, or tax rates.

Step 5: Click Approve to finalize the credit note.

When created from an invoice, Xero links the credit note automatically, making reconciliation easier.

Step 1: From the dashboard, go to Sales, choose Invoices.

Step 2: Click New Credit Note.

Step 3: Enter the product or service details, quantities, unit prices, and applicable taxes.

Step 4: Review the total and click Approve once all details are correct.

Once the credit note is approved, it needs to be applied to the related invoice so the customer’s balance accurately reflects the adjustment.

There are two ways to apply (knock off) a credit note in Xero — either directly from the sales invoice or through the credit note screen.

Step 1: From the dashboard, go to Sales, choose Invoices.

Step 2: Open the invoice that requires a credit.

Step 3: Scroll to the bottom of the invoice; if a credit note is available, you’ll see an option showing Credit Available. Click Apply Credit.

Step 4: Enter the amount to apply in the To Apply field and click Apply

Step 1: Open the approved credit note.

Step 2: Click Credit Note Options, choose Allocate Credit.

Step 3: Xero will display a list of all outstanding invoices for that customer.

Step 4: Enter the amount of credit to apply — either the full or partial value.

Step 5: Click Allocate Credit to complete the process. After allocation, Xero automatically updates the invoice balance and customer account.

Q: Can I edit or delete a credit note after approval?

A: You can void an approved credit note if it hasn’t been applied, but you can’t delete it completely.

Q: Will customers see the credit note automatically?

A: Only if you send it by email from Xero. Otherwise, it remains internal until you choose to share it.

Q: Does Xero automatically apply credits?

A: If you create the credit note directly from the original invoice, Xero will usually apply it automatically. Manually created credit notes must be applied manually.

Q: Can a single credit note be applied to multiple invoices?

A: Yes, Xero allows you to split and allocate a single credit note across several invoices.

Creating and applying credit notes in Xero helps maintain accurate records and ensures your customers’ balances reflect real transactions. By issuing credit notes when adjustments are needed and applying them correctly to invoices, you keep your accounts clean, compliant, and easy to reconcile.