cashflowos Open web appStart free trial Free trial

Glossary Accounting

Credit note

Definition

A credit note is a document a seller issues to reduce what a buyer owes on an earlier invoice, for returns, overcharges or discounts agreed in advance.

Updated 2026-11-052 min read

Example

Verma Hardware returns 4 water heaters billed at ₹6,000 each plus 18% GST. You issue a credit note for ₹24,000 plus ₹4,320 GST, ₹28,320 in all, quoting the original invoice. Verma's outstanding falls by ₹28,320 and your output tax for the period falls by ₹4,320.

Credit note in TallyPrime and in Cashflow OS

Where to find itIn TallyPrime

TallyPrime has a Credit Note voucher type. You select the party, the returned items or an adjustment ledger, and the original bill reference, and it appears in the credit/debit note section of the GSTR-1 report.

On your phoneIn Cashflow OS

Authorised users can create a credit note from the phone or web in Cashflow OS; the connector posts it into Tally, which validates it and returns a reason if it refuses.

See how it works
Credit note in the Cashflow OS app

Common misunderstandings

  • Watch outNot linking the credit note to the original invoice, so the bill still shows as fully unpaid.
  • Watch outIssuing GST credit notes for old invoices after the time limit. Check the limit on cbic-gst.gov.in.

When you issue one

  • The buyer returns goods (a sales return).
  • The invoice charged more than the agreed price or tax.
  • A post-sale discount or scheme was agreed in advance and is linked to specific invoices.
  • Goods or services were found deficient.

Under GST, a credit note that reduces tax must refer to the original invoice and be declared in GSTR-1. There is a time limit: the earlier of 30 November after the end of the financial year or the date you file the annual return. The supplier's reduction in tax also depends on conditions such as the buyer reversing the matching credit. Check the current rules on cbic-gst.gov.in. Our guide on credit and debit notes in GST covers them.

Example

You billed a dealer 100 ceiling fans at ₹2,000 each, ₹2,00,000 plus 18% GST of ₹36,000, total ₹2,36,000. The dealer returns 5 damaged fans. You issue a credit note for ₹10,000 plus ₹1,800 GST, ₹11,800 in all, quoting the original invoice number. The dealer's outstanding drops from ₹2,36,000 to ₹2,24,200, your output tax for the month drops by ₹1,800, and the dealer reduces its ITC by the same amount.

A sample layout is in our credit note format guide.

Where it shows up in TallyPrime

TallyPrime has a Credit Note voucher type. You select the party, the items returned (which brings stock back in) or a ledger for a price adjustment, and the original invoice reference so the bill-wise outstanding is reduced against the right bill. The note appears in GSTR-1's credit/debit note table. With Cashflow OS, an authorised user can also create a credit note from the phone or web, which the connector posts to Tally where Tally validates it.

This is general information, not tax advice.

Related terms

Debit noteGSTR-1Bill-wise detailsVoucherOutstandingAll terms A–Z

Questions about Credit note

Is a credit note the same as a refund?
No. It reduces what the buyer owes. If the bill is already paid, the credit is adjusted against future bills or refunded separately.
Can a buyer issue a credit note?
Under GST, credit notes are issued by the supplier. A buyer who wants to claim a reduction sends a debit note or a letter asking for one.
Do I need a credit note for a cash discount given at payment time?
If the discount was not agreed upfront or not linked to invoices, it may be a commercial credit note with no GST change. Take advice for your case.
Does a credit note need a GST number?
A GST credit note must carry details required by the rules, including the supplier's GSTIN, the recipient's GSTIN if registered, and a reference to the original invoice.
Does a credit note bring stock back?
If it is entered with items for a sales return, yes. If it only adjusts price or discount through a ledger, stock does not change.

This page is general information for Indian businesses, not tax, legal or financial advice. Rules and rates change — check the official portals or your CA before acting.

Read more about Credit note

All guides
GST documentsCredit notes and debit notes in GSTA credit note reduces the value or tax of an invoice already issued; a debit note increases it. Both are issued by the supplier, both are reported in 4 min readCredit notesCredit note format under GSTA GST credit note is issued by the supplier to reduce the value or tax of an invoice already raised: for goods returned, an overcharge, or a deficient3 min readGST documentsSales returns under GSTWhen a customer sends goods back, the supplier issues a credit note against the original invoice, reports it in GSTR-1, and reduces output tax, provid4 min readGST valuationGST on cash discounts given after the saleA cash discount for early payment is usually given after the invoice. You can reduce GST on it only if the discount was agreed before the sale and you4 min read

Cashflow OS · works with TallyPrime

See your own Tally books on the phone

Ledgers, outstanding, GST views and reports for the whole team — in English or Hindi.

Start 14-day free trialBook a free demo