How to allocate a credit note: a guide for Xero users

Short answer: approve the credit note, open it, click Allocate credit (on a supplier credit note it sits under the options button), enter the amount next to the invoice or bill, and click Allocate Credit. Only an awaiting payment invoice or bill for the same contact can take the credit, and Xero needs the same currency on a customer's credit note and invoice. This guide covers the steps for customers and suppliers, why the option is sometimes missing, and how to undo a wrong allocation.

Checked against Xero Central on 5 November 2026.

The rules before you start

Xero treats credit notes, overpayments and prepayments as credit transactions, and the same rules apply to all three (Apply a customer's credit to an invoice, Apply a supplier's credit to a bill):

• Credit goes only on an awaiting payment document, never on a draft or a paid one.
• One document can take several credits, up to what is still outstanding. One credit can be spread over several documents, up to its own total.
• If the credit covers the whole balance, the invoice or bill becomes Paid; otherwise it stays Awaiting Payment. The credit note becomes Paid once all of it is used.
• Xero treats the allocation as a payment, so it shows in cash-based reports. The payment date is the later of the two documents' dates.
• A credit dated in a locked period can go on a document outside it, but not onto a document inside a locked period.

Allocate a credit note, step by step

1. Approve the credit note. Only an approved credit note can be allocated. When you approve one and the contact has an awaiting payment document, Xero prompts you to allocate it straight away; click Cancel to do it later (Create and approve a customer credit note).
2. Find the credit note. For a customer: Sales menu, Invoices, Awaiting Payment tab. For a supplier: Purchases menu, Bills, Awaiting Payment tab. Open the credit note.
3. Open the allocation. On a customer credit note, click Allocate credit at the bottom. On a supplier credit note, click the options button in the top right and select Allocate Credit.
4. Enter the amount. Next to the invoice or bill, type how much of the credit to apply. It can be some or all of the outstanding amount.
5. Confirm. Click Allocate Credit. Open the invoice or bill and check the amount credited and the balance left.

There are quicker routes when you start from the document. On an awaiting payment invoice, the menu icon has Create and apply credit, which raises the credit note and applies it once approved. On a bill, Bill Options has Add Credit Note, and clicking Approve allocates it to that bill (Add a supplier credit note). When you approve a new invoice for a customer who has credit, Xero offers Apply credit there too.

When Allocate credit is missing

Xero lists the usual causes (Can't apply a customer credit):

• Wrong or duplicate contact. The name must be identical on both documents; even a small difference makes two contacts. Merge duplicates first.
• No awaiting payment document. A customer credit goes only on a sales invoice that is approved and unpaid.
• Different currencies. Xero's options include voiding one document and re-entering it in the other's currency; ask your accountant which fits.
• Locked period. Depending on how the lock date was set and your user role, an administrator may need to remove it temporarily, apply the credit, then set it again.
• The credit note is already paid, so there is nothing left to allocate.

Undo a wrong allocation, or refund instead

Open the credit note, click the remove icon next to the allocated amount, and click Delete. Xero says the credit note and the document go back to awaiting payment, ready to allocate again (Remove a customer credit note allocation, Remove a supplier credit note allocation). If the money is going back instead, record a cash refund on the awaiting payment credit note, or reconcile the credit note to the bank line with match or find and match (Process a customer or supplier refund).

Where the native way runs out

• One credit note at a time. Each allocation is opened, typed and confirmed on its own.
• Removing allocations is one at a time too, one remove icon per allocated amount.
• A fully credited invoice can't simply be voided. It reads as Paid, and Xero voids only an invoice that is awaiting payment (Delete or void an invoice). The allocation comes off first; the credit note guide covers that order.

The faster way: Unapprove

Unapprove is a web app that works with Xero. Plainly: it does not allocate an existing credit note to an invoice or bill. Matching your credit notes to documents stays in Xero, as above. Its plain unapprove and void runs skip any document with a credit note allocated, and list it with the reason (why).

Write off run. For writing off what is still owed on many approved invoices or bills, it raises one new credit note per document for exactly the balance, on the account and date you choose, allocates it to that document and checks the balance reads zero. Each one can be reversed within 30 days, with a typed confirmation. The write-off guide has the details.

Remove payments and void. For documents you want cancelled, this run removes the payments and credit note allocations, voids the document, and leaves a note on each credit note saying its credit is available again. Reconciled and batch payments and prepayment or overpayment allocations are left alone.

Documents dated on or before your lock date (why) and documents for an archived contact (why) are skipped in every run.

Price: free for 14 days, with unlimited previews and three documents processed in total. After that, $29 per month per connected organisation, or a one-off $49 Clean-up Pass for 30 days with unlimited documents. Prices are in US dollars and exclude VAT and sales tax (added at checkout); the pricing page has the details.

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