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Credit notes reverse revenue that has already been recognized or deferred. The journal pattern depends on the credit note variant and on the account’s revenue impact mode.

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Credit note variants

Sequence supports four credit note variants. The variant determines how the service period and recognition method are derived.
A credit note issued against a specific invoice, line item, or set of line items.
  • Service period and recognition method are inherited from the original invoice’s line items.
  • If the service period is longer than a single day, the credit note defaults to straight-line recognition.
  • A single-day service period defaults to point-in-time recognition.
  • The reversal posts against the original invoice’s deferred and recognized balances.
This is the most common variant and the most predictable.
A credit note created by Sequence itself when a billing schedule is recalculated and the resulting amount is less than what has already been invoiced. The original invoice is voided and the credit note takes its place.
  • Recognition follows the same inheritance rules as invoice-attached credit notes.
  • Sign, product attribution, and deferred-balance unwinding all use the recalculated values.
A credit note produced when a negating charge appears on a billing schedule (for example, a downward true-up that exceeds the upcoming invoice amount).
  • Sequence resolves the negating charge against the original schedule and produces a credit note whose recognition shape mirrors the original recognition.
  • The credit note’s product attribution matches the schedule line it is reversing.
A credit note that is not tied to a specific invoice. For example, a goodwill credit applied against future invoices.
  • Standalone credit notes follow normal recognition rules with negative amounts.
  • They appear as their own rows in the deferred revenue report.
  • When applied against future invoices, the credit is consumed in line with that invoice’s normal recognition.

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Cancellation vs Adjustment mode

The Credit note revenue impact setting on your revenue recognition settings controls how a credit note moves previously recognized revenue. The two modes produce visibly different journals, and picking the right one matters.
The default is CANCELLATION. Switch to ADJUSTMENT when management reporting relies on recognized + deferred = net billed holding true at all times.

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Cancellation mode

Cancellation mode treats the credit note as the end of an obligation. It deletes any unposted future revenue, reverses the remaining deferred balance, and only touches recognized revenue if the credit exceeds what is still deferred.
Scenario
  • Original invoice: $12,000 annual subscription, billed and recognized 1 Jan 2026 to 31 Dec 2026.
  • As of 30 Sep 2026: $9,000 recognized, $3,000 deferred.
  • Credit note issued 1 Oct 2026: $6,000.
What happens
  1. Future-dated recognition ($3,000 for Q4) is deleted.
  2. The $3,000 deferred balance is reversed: Debit Deferred Revenue (-$3,000), Credit Billed Revenue (-$3,000).
  3. The remaining $3,000 of credit is taken against already-recognized revenue: Debit Recognized Revenue (-$3,000), Credit Billed Revenue (-$3,000).
Result
  • Net billed (after credit): $6,000.
  • Recognized: $6,000.
  • Deferred: $0.
  • The invoice produces no further recognition.

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Adjustment mode

Adjustment mode treats the credit note as a reallocation. The original invoice continues recognizing as scheduled. The credit note posts daily mirror entries that reduce recognized revenue and rebuild deferred revenue across the credit note’s own service period.
Scenario
  • Original invoice: $12,000 annual subscription, recognized straight-line 1 Jan 2026 to 31 Dec 2026. Monthly recognition: $1,000.
  • As of 30 Jun 2026: $6,000 recognized, $6,000 deferred.
  • Credit note issued 1 Jul 2026: $3,000, service period 1 Jul 2026 to 31 Dec 2026 (six months). Monthly allocation: $500.
What happens
  1. On 1 Jul 2026, the deferred balance is reduced by the credit’s net amount of $3,000. Deferred drops from $6,000 to $3,000.
  2. Each month from July to December, two journals post for the credit note:
    • Reverse the credit’s monthly allocation: Debit Recognized Revenue $500.
    • Rebuild deferred by the same amount: Credit Deferred Revenue $500.
  3. The original invoice’s monthly recognition continues unchanged: Debit Deferred Revenue $1,000, Credit Recognized Revenue $1,000.
Why both journals are neededThe original invoice continues recognizing on its own schedule. The rebuilding entry prevents the deferred ledger from over-draining as if the credit had not been issued.Position at month-end
DateRecognizedDeferredSum
30 Jun 2026$6,000$6,000$12,000
1 Jul 2026 (after credit note applied)$6,000$3,000$9,000
31 Jul 2026$6,500$2,500$9,000
31 Aug 2026$7,000$2,000$9,000
30 Sep 2026$7,500$1,500$9,000
31 Oct 2026$8,000$1,000$9,000
30 Nov 2026$8,500$500$9,000
31 Dec 2026$9,000$0$9,000
At every as-of date from 1 Jul onward, recognized + deferred = net billed ($9,000).
Sequence posts the credit note’s reversal and rebuild as daily journals (one per day of the service period). The monthly figures above aggregate those daily entries for readability.

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Inheritance and defaults

When a credit note is created without an explicit service period or recognition method, Sequence fills the gaps from the originating document.
  • Service period is taken from the linked invoice line items.
  • Recognition method is inferred from the service period: longer than one day defaults to straight-line; single-day defaults to point-in-time.
  • Accounting date falls back through a chain when missing: corrected billing period, then credit note issue date, then original invoice billing period.
If the linked invoice’s recognition method has been overridden (for example, to force straight-line on a credit note that would otherwise have been point-in-time), that override is preserved across credit note regeneration.

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Direction of the reversal

A credit note’s line item amount can be positive (a refund) or negative (an additional charge flowing through the credit note document). The sign of the line item determines the direction of the reversal in future journals:
  • Positive credit note: recognized revenue decreases over time.
  • Negative line item on a credit note: recognized revenue increases over time.
The deferred revenue report’s Remaining column reflects this signed contribution to the deferred balance.

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Regeneration and historical preservation

When the line items on a credit note are regenerated (for example, because the originating invoice was recalculated), Sequence re-recognizes the credit note in line with the new shape. Two guardrails apply:
  • Recognition method is preserved. A straight-line credit note stays straight-line.
  • Cases that do not reconcile are skipped. If a credit note’s totals do not align cleanly to the related invoice (for example, because the document was manually edited or has rounding inconsistencies that will not reconcile), Sequence keeps the existing document rather than regenerating something it cannot validate.
In those skipped cases, the existing journals stand and the document is flagged for manual review.

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Credit notes and account period locks

When account period locking is enabled, credit note reversals respect the lock the same way invoices do:
  • Reversals that would post into a locked period are held back to the first open day.
  • Journal narratives explicitly note when an entry has been shifted to respect the lock.
  • The portion of the credit note service period that sits before the lock is reversed in a single catch-up entry on the lock end date. Everything after the lock unwinds day-by-day as normal.

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When to override recognition on a credit note

The default inheritance behaviour is usually correct. Two situations call for an override:
  • You want the credit fully reversed today, rather than spread across a service period. Switch the credit note’s recognition method to point-in-time. Common when the originating invoice was issued in error or the customer has not paid.
  • You want the credit reallocated across the service period, rather than capped at recognized-to-date. Set the account to adjustment mode and confirm the credit note’s service period covers the period you want the reallocation to apply to.