A credit note is the document a seller issues to reduce an invoice already sent, and a debit note is the one that increases it. Enter the original invoice number, date and amount, then the adjustment and its reason, and the generator works out the note's VAT at the Saudi rate of 15%, rounded to the halala, and lays the invoice before and after the adjustment side by side. For returned goods, the "Sales return" tab builds the note from the items, quantities and prices instead of a single amount.
How VAT on a credit or debit note and the adjusted invoice is calculated
VAT on a note is charged on its amount before VAT at the same rate as the original invoice, rounded to the nearest halala. The note is then subtracted from the original invoice if it credits, or added to it if it debits, line by line: the amount before VAT, then the VAT, then the total.
Note VAT = Note net × 15% · Adjusted = Original ∓ Note
What is a credit note?
A credit note reduces what the customer owes on an invoice issued earlier. Sellers issue one when goods come back, when a discount is granted after the sale, when part of a supply is cancelled, or when an invoice turns out to be overcharged. It carries its own sequential number, quotes the original invoice number and date, states the reason, and shows the amount before VAT separately from the VAT. It cannot exceed the invoice it adjusts, which is why the generator rejects an amount larger than the original invoice.
It is called a credit note because the seller posts it to the credit side of the customer's account, which lowers the balance the customer owes. On the buyer's side, the same note reduces purchases and input VAT by the same amount.
Debit note meaning and when to use one
A debit note increases the amount due on an earlier invoice instead of issuing a whole new invoice: a price rise agreed after the sale, an error that understated the quantity or price, or delivery or installation charges left off. It is posted to the debit side of the customer's account, raising the balance, and carries VAT on the increase.
In both cases the seller issues the note. What a buyer sends its supplier to ask for a reduction is called a "debit note from the buyer" in some companies; it is an internal request and does not replace the note the supplier has to issue.
Credit note template: required details and reasons
The note shows its own number and date, the seller's name and VAT number, the buyer's name and VAT number if registered, the original invoice number and date, the reason, then the amount before VAT, the VAT and the total. The reason field in the generator is a list of common reasons with an "Other reason" option, and nothing downloads until you pick one; months later, a note with no reason leaves nobody knowing why the invoice changed.
Use one reason per note. If a customer returns goods and gets a discount on the same day, two notes with two reasons are clearer. Check the requirements in the e-invoicing regulation and the detailed guidelines of the Zakat, Tax and Customs Authority in Saudi Arabia; the generator follows the known fields and does not replace the current text.
Sales return notes, and credit note vs debit note
A sales return note is a credit note issued because goods came back. Each returned item is listed with its quantity and price, so the same document is used to put the items back into stock. That is the "Sales return" tab: the generator adds up the items and works out VAT on their total.
| Credit note | Debit note | |
|---|---|---|
| Effect on the invoice | Reduces it | Increases it |
| Effect on VAT due | Reduces output VAT | Increases output VAT |
| Entry in the seller's books | Credit the customer's account | Debit the customer's account |
| Most common reasons | Return, discount after sale, cancellation | Price increase, undercharge corrected, charges left off |
Common mistakes with credit and debit notes
- Issuing a note without the original invoice number, so nobody can tell which invoice it changed.
- Leaving the reason blank, or writing only "adjustment".
- Changing the amount but not the VAT, or the other way round.
- Charging VAT on the note at a different rate from the original invoice.
- Cancelling or editing the original invoice directly instead of issuing a note.
- Crediting more than the original invoice was for.
What to do with the result
Download the note as a PDF and send it to the customer with a copy of the original invoice, then post it to the customer's account and the sales journal on its date. The Excel file keeps the figures as formulas, with one cell for the rate and one for the sign (−1 to credit, +1 to debit), so changing the note amount updates the adjusted invoice. If you are registered for VAT in the Kingdom, enter the same figures in the e-invoicing solution you issue your invoices from. For a new invoice, use the tax invoice generator. To record the quantity actually returned, use the delivery note and goods received note generator.
When returns come back every week
One note is easy to write by hand. When a sales rep comes back every day with returns from several customers, each note has to match its invoice, put the items back into stock and reduce output VAT on the return, and one wrong note shows up at month-end close. At Microtec we offer accounting software (ERP) that keeps sales, purchasing, inventory and finance together, and our solutions are approved by the Zakat, Tax and Customs Authority. Try it on next week's returns.