Introduction
Supplier credit notes are used when a supplier reduces the amount your business owes — for example, due to returned items, incorrect pricing, or discounts provided after a purchase. Recording credit notes properly ensures your accounts payable and expense values remain accurate.
Before You Begin
Make sure:
The supplier exists in your contacts list.
The original bill (if relevant) is already approved.
The bill still has an outstanding balance that can be reduced.
This guide covers two main areas:
How to create a supplier credit note
How to allocate a credit note to a bill
How to Create a Supplier Credit Note in Xero
Supplier credit notes can be created in two different ways in Xero:
Option 1: Create a Credit Note Directly from an Existing Bill
Option 2: Create a Credit Note Manually (as a standalone)
Option 1: Create a Credit Note Directly from an Existing Bill
Step 1: From the dashboard, go to Purchases, then select Bills.
Step 2: Open the supplier bill that needs adjustment.
Step 3: Click Bill Options.
Step 4: Select Add Credit Note.
Step 5: Xero will copy the details from the original bill — update quantities, pricing, or tax if needed.
Step 6: Click Approve to confirm the credit note.
When created from the bill, Xero automatically links the credit for easier allocation.
Option 2: Create a Credit Note Manually
Step 1: From the dashboard, go to Purchases, then select Bills.
Step 2: Click New Bills, and select New credit note.
Step 3: Enter details such as description, amounts, account codes, and tax rates.
Step 4: Review and select Approve to post the credit.
How to Allocate the Credit Note to a Bill
Once approved, the credit note needs to be allocated so it reduces the supplier balance.
Step 1: Open the approved supplier credit note. Click Credit Note Options and select Allocate Credit.
Step 2: Choose which outstanding bill(s) to apply it to and click Allocate Credit to finish.
Tips for Applying Credits in Xero
Credits can be split across multiple bills.
Allocations can be undone using Remove & Redo.
Use History & Notes for an audit trail.
Frequently Asked Questions (FAQs) about Supplier Credit Note in Xero
Q: Can I edit or delete a supplier credit note once approved?
A: You can void a credit note if it hasn’t been allocated yet, but you cannot delete it.
Q: Will suppliers be notified automatically?
A: No, credit notes are internal unless shared manually.
Q: Can Xero match supplier credits automatically?
A: If the credit note was created from the original bill, Xero will link it automatically, but you still need to allocate.
Q: Can I attach the supplier’s document?
A: Yes, use Attach file to support the credit note with the supplier's document.
Conclusion
Recording supplier credit notes in Xero ensures your expenses and payables reflect the real amounts owed. By creating and allocating credit notes properly, you keep your accounts accurate and reconciliation smooth.