Credit note

Once an invoice is issued it generally cannot be edited — it is a legal and tax document, and in many jurisdictions altering it is not permitted. A credit note is the mechanism for reducing what is owed after the fact.

Credit notes arise from four common situations:

1. A downgrade or cancellation mid-period, where proration means the customer owes less than invoiced.
2. A billing error — wrong quantity, wrong price, wrong tax treatment.
3. A commercial concession — a service credit against an SLA breach, or a goodwill gesture.
4. A genuine refund, where money already collected goes back.

Applied credit versus refund

These are different outcomes and the contract should specify which applies:

• An applied credit reduces future invoices. No cash moves. This is the default in most B2B SaaS contracts.
• A refund returns money the customer has already paid. This is comparatively rare in B2B and usually reserved for errors rather than downgrades.

Why they matter beyond billing

Credit notes reverse recognised revenue, which means they flow through to revenue recognition, tax reporting and your churn figures. A downgrade processed as a credit note is contraction; a full cancellation credit is churn.

If credits are issued outside the billing system — a manual adjustment in the accounting package, or an off-system discount agreed by email — those movements never reach the metrics, and reported retention overstates reality by however much has been quietly given away.