A credit note is a document you give a customer to reduce the amount of an invoice you already issued — usually because goods came back, were overcharged or got a late discount. It reverses part of the sale: sales go down, the VAT on that part goes down, and returned goods go back into stock.
KhataIN Business creates a credit note straight from the original invoice, so the customer, prices and VAT match the sale you are reversing.
What is a credit note?
Once an invoice is issued, you should not edit or delete it — the customer has a copy and, if you are VAT-registered, it is already in your sales records. Instead you issue a second document that points back to it: the credit note. The customer either gets a refund or pays less on their account.
When should you issue a credit note?
- Goods returned — the customer brings back some or all of what they bought.
- Overcharge — the wrong price or quantity was billed.
- Discount after the sale — you agree to reduce the price after invoicing, for example for a damaged carton.
- Cancelled service — part of a service billed in advance will not be delivered.
If you simply made a typing error before giving the invoice to the customer, follow your own cancellation process instead. Once it is with the customer, use a credit note.
What should a credit note show?
A clear credit note shows:
- its own number and date (BS date is fine),
- the number and date of the original invoice,
- the customer's name and, if they are VAT-registered, their PAN,
- the items, quantities and prices being credited,
- the VAT being reversed, shown separately,
- the reason — "returned", "price correction" and so on.
Nepal's VAT Rules set out the details that credit and debit notes must carry for VAT-registered businesses. Check the current requirements with the Inland Revenue Department (ird.gov.np) or your tax professional.
How does a sales return change VAT?
When the original sale was taxable, you charged output VAT on it. If part of that sale is reversed, the VAT on that part is reversed too, so your output VAT for the period goes down. The customer, if VAT-registered, reduces the input VAT they claimed. Read VAT in Nepal for how output and input VAT work, and use the VAT calculator to split a VAT-inclusive amount.
How does a sales return change stock?
Goods that come back in good condition go back into stock at the cost you originally recorded — not the selling price. Goods that come back damaged and cannot be resold should not be added to sellable stock; record them as a loss (a stock write-off) instead. See inventory and cost of goods sold.
Worked example: a returned kettle
A VAT-registered appliance shop sold 10 electric kettles on credit at Rs 2,000 each. Each kettle cost the shop Rs 1,500.
A week later the customer returns 2 kettles in good condition. The shop issues a credit note for 2 × Rs 2,000 = Rs 4,000 plus VAT of Rs 520, a total of Rs 4,520.
Entry 1 — reverse the sale and the VAT:
| Account | Debit | Credit |
|---|---|---|
| Sales returns | Rs 4,000 | |
| VAT payable (output VAT) | Rs 520 | |
| Customer account (receivable) | Rs 4,520 |
Entry 2 — put the kettles back into stock at cost (2 × Rs 1,500):
| Account | Debit | Credit |
|---|---|---|
| Inventory | Rs 3,000 | |
| Cost of goods sold | Rs 3,000 |
The customer now owes Rs 22,600 − Rs 4,520 = Rs 18,080. If the customer had already paid in full, you would refund Rs 4,520 instead: debit the customer account and credit cash or bank.
Net effect on profit: sales fall by Rs 4,000 and cost of goods sold falls by Rs 3,000, so gross profit falls by Rs 1,000 — the margin on the two kettles that came back.
Some shops debit Sales directly instead of using a separate Sales returns account. Both are correct; a separate account shows how much comes back each month.
Frequently asked questions
Can I just delete the invoice instead of issuing a credit note?
No. Once an invoice has been given to the customer it is part of your sales records, and deleting it breaks the invoice number sequence and your VAT records. Issue a credit note that refers to the original invoice so both documents stay on file.
Does a credit note always mean a cash refund?
No. If the customer has not paid yet, the credit note simply reduces what they owe. If they have paid, you can refund them or keep the credit on their account against their next purchase.
Do I reverse VAT on a credit note if I am not VAT-registered?
If you did not charge VAT on the original invoice, there is no VAT to reverse. The credit note only reduces the sale amount and, for returned goods, adds the items back to stock.
What happens to damaged goods that are returned?
You still issue the credit note to the customer, but you do not count damaged items as sellable stock. Record them as a stock loss so your inventory and profit stay accurate.
Last checked: 13 November 2026. VAT rules change with each Finance Act — confirm your own situation with the Inland Revenue Department or a registered tax professional.