Credit notes, returns, and discounts
Objective: Record credit notes and sales discounts.
Recommended first: Invoicing and accounts receivable
A credit note reduces what a customer owes, usually for a return or an allowance for a problem. Terms like 2/10, net 30 offer a 2% discount if paid within 10 days. Both are recorded in contra-revenue accounts so gross sales stay visible.
Contra-revenue accounts keep the full story. Gross sales show demand; returns and discounts show how much was given back. When a customer pays within a discount period, the full invoice is cleared even though less cash is received; the discount explains the gap. Credit notes should reference the original invoice so the subledger can apply them correctly.
Check your work
- Is the full receivable cleared?
- Is the discount or return in a contra-revenue account?
- Does the credit note reference the original invoice?
Customer pays a $1,000 invoice within 10 days on 2/10, net 30.
| Account | Debit | Credit |
|---|---|---|
| Cash | $980.00 | |
| Sales Discounts | $20.00 | |
| Accounts Receivable | $1,000.00 |
Common mistakes
✗ Leaving $20 open on the receivable.
✓ The discount clears the invoice in full.
Guided practice
Use hints freely here.
Item 1 of 1
Issue a credit note (sales return)
On Mar 14, 2026, Little Fern Online Shop issues credit note CN-17 for $95.00 to a customer who returned items bought on account. (Ignore inventory and cost of goods sold for this exercise.)
Independent practice
Try these without hints. Completing the lesson needs at least one independent item solved without revealing the answer.
Item 1 of 4
Customer takes an early-payment discount
On Mar 9, 2026, a customer pays Little Fern Online Shop's $700.00 invoice within the discount period under terms 2/10, net 30.
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Key terms
- Credit note
- A document reducing what a customer owes.
- Sales discount
- A reduction for early payment, recorded as contra revenue.
- Sales returns and allowances
- A contra-revenue account for returns and price reductions.
References and provenance
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting (accessed 2026-10-29)
Original lesson written for Bookkeeping Exercises (AI-assisted drafting). Calculations are verified by the platform's automated accounting tests. Not yet reviewed by a credentialed accountant. Updated 2026-10-29.