Sales invoices, credit notes and refunds describe different events. An invoice records an amount billed to a customer. A credit note reduces or reverses that billed amount. A refund records money returned. Keeping them connected prevents duplicated sales, unexplained bank payments and customer balances that no longer reflect what is owed.
In this article
- Issue a numbered invoice
- Record any credit note
- Match the customer payment
- Check the remaining balance
The key is to follow the whole transaction, from the original sale to the final settlement. A bank receipt or payment is only one part of that trail. The bookkeeping needs to explain why the balance changed as well as when cash moved.
Create an invoice that can be traced
Use a unique invoice reference, identify the customer and describe the goods or services clearly. Record the relevant dates, amount and agreed payment terms. Keep evidence of delivery, customer approval or the work completed where that helps explain the charge.
Check the customer details before sending the invoice. A correct bill sent to an unattended email address can become an unnecessary collection problem. Save the version actually issued and avoid quietly editing it after the customer has received it.
Match receipts to the correct invoice. If a customer pays £900 against three £300 invoices, allocate the payment across those invoices. Do not add a new £900 sale simply because a deposit appeared in the bank feed.
Use a credit note for the change in the sale
A returned product, agreed price reduction or cancelled service may require a credit note. Reference the original invoice and explain the reason, so the customer and bookkeeper can understand the adjustment.
For VAT records, HMRC’s guidance requires retention of credit notes and the original invoice, and sets out supporting details including the reason and original invoice reference. VAT adjustments should follow the relevant rules and facts; do not infer the tax treatment from the bank refund alone.
Preserve the original document and issue an identifiable correction. Deleting an invoice can remove the evidence for a sale already reported, paid or disputed. If the problem is merely an address typo, check the appropriate correction process rather than treating every edit as a cancellation.
Separate the credit from the refund
Illustrative example, ignoring VAT: a customer is invoiced £500 and pays it in full. An agreed reduction of £100 is then documented by a credit note. The customer account now shows £100 owed back to the customer. A £100 bank refund clears that balance.
| Event | Customer balance after event | Cash movement |
|---|---|---|
| Invoice for £500 | Customer owes £500 | None |
| Payment of £500 | Nil | £500 received |
| Credit note for £100 | Business owes customer £100 | None |
| Refund of £100 | Nil | £100 paid |
The final net sale is £400 and net cash received is £400. If the refund were entered as a new operating expense while the £500 invoice remained unchanged, sales and expenses would both be overstated. If both the credit note and refund reduced sales separately, the reduction could be counted twice.
Handle unpaid invoices and overpayments differently
When the original invoice remains unpaid, a credit note may simply reduce the amount the customer still owes. No refund is needed unless money is actually due back.
An overpayment is also different from a reduction in the sale. If a customer accidentally pays £550 against a valid £500 invoice, investigate and agree whether the extra £50 will be refunded or allocated elsewhere. Do not create a credit note that suggests the £500 sale was wrong when it was not.
Customer deposits, advance payments and gift arrangements may need their own accounting and VAT review. Record what the money relates to and the terms of repayment or future supply. A label such as “deposit” does not settle every recognition question.
Reconcile payment-provider deductions
Online platforms can deduct refunds, chargebacks and fees before sending a settlement. Download the settlement report and connect each adjustment to the relevant order and customer record. The bank deposit alone cannot explain the gross sales or which customers have already been refunded.
Keep chargebacks separate while their outcome is uncertain. A dispute raised by a cardholder is not necessarily the same as an agreed price reduction. Assign someone to track evidence requests and final decisions.
Run a weekly exceptions check
Review unallocated receipts, credit balances, duplicate invoices and refunds without linked documents. Ask whether credit notes have approval and whether customers received the correct paperwork. Check that a customer balance carried forward matches the actual agreement.
A tidy sales ledger makes both collections and reporting easier. EPOS bookkeeping services can be discussed around invoice allocation, credit-note controls and reconciliation of online settlements.