Credit notes can be used to cancel incorrect invoices
An invoice is a legally binding document, and if you need to make any changes to them, then there are laws concerning this. When you notice there is a mistake on an invoice, the only way you can correct this is by using a credit note.
You must cancel the invoice using the credit note and then issue a new invoice. Therefore, the credit note indirectly “pays” the erroneous invoice, so no payments are outstanding. Therefore, you would be required to process the credit note as payment for invoicing, balance your books, and send it to the customer, so they know that their debt has been cancelled.
You can then issue a new invoice.
Credit notes can be used for refunds
A credit note is the right document to use when a refund is deemed necessary. One of the reasons goods would need to be returned would be if they were received faulty or damaged.
In this case, a credit note would be issued to show that a refund took place.
You may also issue a credit note to a customer if they decided to return the product they purchased to show that the money was refunded.
In most of these instances, the money will either be given back to the customer, or their account is credited with the specific amount in the credit note to balance your accounts.
Alternatively, if you are only refunding a portion of the original sales, then the credit note would have to be edited to show the portion refunded and the reason for the partial refund.
Credit notes can be used for cancelling due payments.
Even when money hasn’t been exchanged already, the credit note will be needed to cancel the “what is owed” so the books can balance.
Before payment is made, the customer could change their mind about the purchase and would wish to cancel it, which is allowed.
You may also be unable to supply the goods ordered and wish to cancel the transaction before payment is made.
In both of these cases, the credit note is the main document in use here, and it must be sent to the customer to inform them that they no longer owe you anything.