Credit note processing is the set of steps by which a seller issues, and a buyer records, a document that reduces the amount owed on an earlier invoice. A credit note, also called a credit memo, is raised for returned goods, short deliveries, pricing errors, agreed discounts or a cancelled sale. On the seller's side the request is checked against the original invoice and supporting evidence, independently approved and posted to reduce revenue, sales tax and accounts receivable.
On the buyer's side, accounts payable matches the credit note to the invoice and any return record, then applies it against that invoice or a later payment, or requests a refund. Because credit notes can be used to hide theft or inflate earlier sales, firms set approval limits and review unusual volumes. Many credit notes begin as a disputed invoice; the buyer's mirror document is handled in debit note processing.