How to apply a supplier credit note to a bill in Xero

Short answer

1. Enter the supplier credit note in Xero.
2. Approve it.
3. Open it and click Allocate Credit.
4. Pick the bill and enter the amount.
5. Pay the balance left on the bill.

Before you start

You need the supplier’s credit note and the invoice it relates to. The invoice must already be entered and approved in Xero. If the credit arrived before the invoice, wait for the invoice, then allocate. Know the amounts including GST, since a credit note carries the GST back.

The manual way in Xero

1. Go to Purchases > Bills. Click the arrow beside New bill and choose New credit note.
2. Enter the supplier as the contact. Use the supplier’s credit note number as the reference. Add the lines with account, quantity, unit price and tax rate, matching the lines being credited.
3. Click Approve. The credit note now has a balance.
4. Open the credit note. In the credit note options, choose Allocate Credit. Xero lists the supplier’s outstanding bills.
5. Select the bill. Type the amount to apply. Click Allocate.
6. Open the bill. The amount due is lower by the credit. Pay the rest as normal.

The edge cases are where time goes. A paid bill cannot take a new allocation. Xero’s forum has threads where users report that a credit note created after a bill does not offer that bill, so check the credit shows against the right bill before you pay. A credit with no matching bill sits unallocated against the supplier. A credit note in a foreign currency needs the currency added to the organisation first.

If the supplier owes you a refund instead, record it as a refund against the credit note rather than allocating it.

The Pulsify way

1. Forward the credit note to your Pulsify address. Pulsify recognises it as an adjustment note and reads the amounts and the original invoice number.
2. It links the credit note to the original bill in Xero. You can also choose the original from the Original Invoice picker, which lists the supplier’s bills.
3. Pulsify flags a credit note that has no original, names an original it cannot find or is larger than the original.
4. Approve it. Pulsify creates the credit note in Xero and allocates it against the original bill.

Only an authorised bill can take the allocation. A paid bill shows “No balance left to allocate against”.

Worked example

Example Plumbing Supplies buys $2,200.00 of materials, including GST, on invoice INV-3302. The supplier sends credit note CN-118 for $330.00 including GST, because 10 fittings arrived damaged.

Step	Amount incl GST
Bill INV-3302	$2,200.00
Credit note CN-118	-$330.00
Amount to pay	$1,870.00

The credit note carries $30.00 of GST back ($330.00 / 11). Your GST on purchases for the quarter drops by that amount. If you pay INV-3302 in full before allocating, you overpay by $330.00 and wait for a refund or the next bill. Allocate first, then pay.

Where it goes wrong in practice

The usual trouble is timing. A credit note often arrives days after the bill, and by then someone has scheduled the bill for payment. Check the supplier’s page in Xero for unallocated credits before each pay run. If the supplier sends credits by statement only, ask for the credit note documents so each one has a number you can reference.

Common mistakes

• Paying the full bill first. The credit then has nothing to apply to and sits unused.
• Entering the credit as a positive bill. It adds to what you owe instead of reducing it.
• Leaving the GST off. The credit must reverse the GST on the credited lines.

Next step

Try an invoice with a credit note from your own supplier. Or book a call to find out how customers have saved hours per week after switching.

Read the invoice checks guide to see what Pulsify flags. The free credit note generator makes a credit note document if you need to issue one.