How do I deal with cancelled invoices in my bookkeeping?

Understanding what a “cancelled invoice” really means

A cancelled invoice is an invoice that you originally issued (or received) but that you later decide should no longer be treated as a valid request for payment. In everyday bookkeeping, cancellation usually happens because the underlying transaction changed: an order was called off, a service was not delivered, a customer returned goods, the price or quantity was wrong, or the invoice was created in error. The accounting goal is simple: your books should reflect what actually happened in the real world, not what a document once said should happen.

It’s important to separate three concepts that often get mixed together: cancelling an invoice, voiding an invoice, and issuing a credit note (or credit memo). Different systems use different labels, but the underlying idea is consistent. “Cancel” or “void” typically means the invoice is being taken out of circulation as if it should not be paid. A credit note, on the other hand, is a formal accounting document that reduces or reverses the amount of a previously issued invoice while preserving the history of that invoice. In many jurisdictions and in many accounting systems, credit notes are the preferred approach for correcting invoices that have already been sent, because they preserve an auditable trail.

If you’re asking, “How do I deal with cancelled invoices in my bookkeeping?” you’re really asking two questions: (1) what is the correct accounting treatment so my accounts are accurate, and (2) what is the best process so I’m consistent, compliant, and able to explain what happened later. This article tackles both, with practical steps, examples, and a workflow you can implement immediately.

Why handling cancelled invoices correctly matters

Cancelled invoices affect more than just your sales or expense totals. If you handle them casually—by deleting them, overwriting them, or ignoring them—you can create ripple effects across your entire bookkeeping system. Here are the most common areas impacted:

Revenue and profit: If you record an invoice as revenue and later cancel it without properly reversing the accounting entries, your revenue and profit will be overstated.

Accounts receivable (A/R): Invoicing creates a receivable. If the invoice is cancelled but the receivable remains, your A/R aging report will show money “owed” that will never arrive. That makes cash flow forecasting and collections activity messy and misleading.

Tax reporting: Sales tax, VAT, or GST may have been calculated on the original invoice. If it’s cancelled, the tax position needs to be corrected in the proper period and method according to your rules and filing schedule. Even if you’re not filing immediately, you want your records to match what you will file.

Audit trail and internal control: In many businesses, invoices are a controlled document sequence. Gaps or deletions can raise questions. A clean process—such as voiding with a reason code or issuing a credit note—helps you demonstrate that the cancellation was legitimate.

Customer relationships and collections: If your system shows an invoice outstanding, someone may chase the customer for payment, damaging trust. Or a customer might pay the wrong amount, forcing a refund or creating credits you must track.

In short, cancelled invoices are not just “admin.” They are accounting events that require a controlled, repeatable approach.

First decision: cash basis vs accrual basis bookkeeping

Before you decide how to record cancelled invoices, you need to understand the bookkeeping basis you’re using, because it changes the timing and sometimes the necessity of certain entries.

Accrual basis: Under accrual accounting, issuing an invoice typically creates revenue (or an expense) and a corresponding receivable (or payable), even if no cash has changed hands. When an invoice is cancelled, you must reverse or offset that recognition. This is why cancellations are more visible and more important to handle precisely under accrual accounting.

Cash basis: Under cash basis, you generally recognize income and expenses when cash is received or paid. If you issue an invoice and later cancel it before any payment is received, the cancellation might not affect profit and loss directly because you never recognized the income. However, most bookkeeping systems still track invoices and receivables operationally even on cash basis, and you still need to keep the customer ledger clean, avoid chasing payments that won’t happen, and maintain correct tax treatment if your tax rules require invoice-based reporting.

If you’re unsure which basis you’re on, check your financial statements and tax filings, or review your accounting settings. Many small businesses use accrual internally even if they file taxes on a cash basis, and some use hybrid approaches. The safe approach is to treat cancellations as bookkeeping events that need a proper trail regardless of basis, and then ensure your reports are set to the appropriate basis when you evaluate profit.

Second decision: has the invoice been sent, posted, or paid?

How you deal with a cancelled invoice depends heavily on the invoice’s lifecycle stage. A good process starts by categorizing the cancellation scenario into one of these buckets:

1) Draft invoice that was never issued: You created it but never sent it or never finalized it. This is the simplest case. Many systems allow deletion or editing before the invoice becomes an official document. Your main job is to ensure you don’t accidentally reuse the number in a way that breaks your numbering sequence rules.

2) Issued invoice, not yet paid: The invoice was sent to the customer and is part of your document history, but no payment has been received. This is the most common cancellation scenario. The best practice is to void/cancel it in a way that keeps the record and reverses any accounting impact, or to issue a credit note against it, depending on your system and your regulatory environment.

3) Invoice partially paid: Some payment has been received, but the invoice is being cancelled or reduced. You’ll need to decide whether to refund the payment, reallocate it to another invoice, or keep it as a customer credit for future invoices. Your bookkeeping will likely involve a credit note and a payment allocation decision.

4) Invoice fully paid: If the invoice is cancelled after being paid, you’re effectively undoing a completed transaction. Usually this means issuing a credit note and then refunding the customer or leaving the amount as a credit balance. You’ll also need to consider tax adjustments and bank reconciliation impacts.

Always start by identifying which bucket you’re in. It prevents mistakes like “voiding” an invoice that has payments applied (which can create negative balances, duplicated cash entries, or reconciliation nightmares).

The cleanest accounting approach: voiding vs credit notes

Bookkeepers often ask whether to void a cancelled invoice or issue a credit note. The correct answer depends on your software capabilities, compliance environment, and the reason for cancellation.

When voiding (cancelling) is appropriate

Voiding is generally appropriate when the invoice should never have existed as a valid billing document. Typical examples include:

Duplicate invoice: You accidentally issued the same invoice twice.

Wrong customer: You billed the wrong person/entity.

Administrative error before performance: The invoice was issued prematurely, and you are reissuing it correctly.

In a good accounting system, voiding will keep the invoice record, mark it as void/cancelled, and create reversing journal entries (or equivalent internal adjustments) so that revenue, receivables, and tax are no longer recognized from that invoice. It should also preserve the invoice number sequence and record who voided it and why.

When a credit note is the better practice

A credit note is usually preferred when the invoice was legitimate at the time it was issued but later needs to be reduced or reversed due to business events. Examples include:

Returns and refunds: Goods were returned after invoicing.

Service not delivered or reduced scope: The customer cancelled the service after you billed, or part of the work was not completed.

Price adjustments: You agree on a discount after invoicing, or a billing mistake is discovered after the invoice was sent.

Tax corrections: Tax rate, tax status, or tax code was incorrect on the original invoice.

Credit notes create a clear paper trail: the original invoice remains, and the credit note explicitly offsets it. This is often easier to defend in reviews, and it helps your customer understand what happened: “Invoice X was credited by Credit Note Y.”

Practical rule of thumb

If you can safely delete it because it never became official, do so (or keep it as a draft and abandon it). If it became official, avoid deletion and use either voiding (for “shouldn’t exist”) or credit notes (for “was valid then, changed later”). This preserves your audit trail and keeps your reports clean.

Step-by-step bookkeeping: cancelling an unpaid sales invoice (accounts receivable)

Let’s walk through the most common scenario: you issued a sales invoice, it’s unpaid, and now it needs to be cancelled.

Step 1: Confirm the reason and timing. Document why the invoice is being cancelled and when the decision was made. Even a short note like “Order cancelled by customer before shipment” is helpful. This matters for internal control and tax period decisions.

Step 2: Decide void vs credit note. If it was a mistake or duplicate, void. If it was a real transaction that changed, credit note.

Step 3: Apply the cancellation in your accounting system. Use the system function (“Void,” “Cancel,” or “Credit Note”) rather than manual journal entries, unless you have a strong reason not to. System functions tend to update linked records (customer balances, tax reports, invoice status, and aging) correctly.

Step 4: Check the general ledger impact. Under accrual accounting, a sales invoice typically posts:

Debit: Accounts Receivable

Credit: Sales/Revenue

Credit: Sales Tax/VAT Payable (if applicable)

Voiding or crediting should reverse these entries. You want A/R to drop back down, revenue to reduce appropriately, and tax payable to adjust.

Step 5: Verify the customer ledger. The customer’s balance should no longer show the cancelled amount as due. Your A/R aging should no longer include it.

Step 6: Communicate with the customer. Send a cancellation confirmation or the credit note. This is not strictly “bookkeeping,” but it prevents later confusion and incorrect payments.

Step 7: Review reports for the period. Confirm that revenue and tax reports reflect the cancellation in the correct period according to your accounting and tax rules.

Step-by-step bookkeeping: cancelling an accounts payable invoice (supplier bill)

Cancelled invoices aren’t only your sales invoices. You may also need to deal with supplier bills that are cancelled or corrected (for example, a supplier issues a bill in error or cancels it and reissues). Handling this correctly is just as important because it affects expenses, payables, and potentially input tax credits.

Step 1: Confirm whether you received a corrected document. Suppliers often send a credit note or a corrected invoice. Your bookkeeping should mirror the supplier’s documentation rather than improvising, because your records may be compared later.

Step 2: Avoid deleting posted bills when possible. If you already recorded the bill, use a supplier credit (credit note) or void the bill based on your system’s rules.

Step 3: Check the postings. A typical supplier bill posts:

Debit: Expense or Inventory

Debit: Recoverable VAT/Input Tax (if applicable)

Credit: Accounts Payable

When cancelled, those entries should reverse so you don’t overstate expenses or show payables that won’t be paid.

Step 4: Handle any payments already made. If you already paid the supplier, the cancellation turns into a refund due from the supplier, a credit on account, or an allocation to another bill. Record the outcome clearly.

What to do if the cancelled invoice was partially or fully paid

Payments complicate cancellations because cash has moved, and your bank reconciliation must remain consistent. The key is to treat the cancellation as two separate problems: (1) reversing the invoice’s accounting impact, and (2) deciding how to settle the cash difference (refund, reallocate, or credit).

Scenario A: partially paid invoice, then cancelled

Suppose you billed a customer for 1,000 and they paid 300, then the transaction is cancelled. You have options:

Refund the 300: You will credit the invoice (or void and recreate a structure that fits your system), then record a refund transaction that matches your bank movement. Your customer balance should end at zero, and your bank should show the outflow of 300.

Keep 300 as a customer credit: If the customer agrees, you can leave the 300 on their account as a credit to be applied to a future invoice. Your bookkeeping should show a credit balance (a liability) until it’s used. Many systems handle this automatically when you create a credit note and leave it unapplied or apply it to a future invoice later.

Reallocate the 300 to a different invoice: If the payment was intended for multiple invoices or the customer clarifies it should apply elsewhere, you can unapply and reapply the payment. Do this using your system’s allocation tools so the audit trail is clear.

Scenario B: fully paid invoice, then cancelled

If a customer paid an invoice in full and you cancel it afterward, you will almost always need a credit note rather than a void, because voiding a paid invoice can create inconsistencies in your cash records. The usual workflow is:

1) Issue a credit note for the full amount (or the portion being reversed).

2) Decide whether to refund or leave as credit.

3) Record the refund payment (if applicable) and reconcile it to your bank feed/statement.

This approach keeps the original payment intact and traceable, while showing that the invoice has been offset by a credit note.

How cancelled invoices affect VAT/GST/sales tax

Taxes are where small bookkeeping mistakes become big headaches. If your invoice included VAT/GST/sales tax and you cancel it, you need to ensure the tax is corrected in the right way.

If the invoice is cancelled before tax is reported: Ideally, the cancellation (void or credit note) will remove the tax from your tax reports for that filing period. Verify your tax report to ensure the taxable sales and the tax amount have been reduced.

If the invoice is cancelled after tax has been reported: You may need to adjust in a later period. Many tax regimes allow (or require) you to account for the credit note in the period it is issued, which effectively corrects your net tax in that later return. This is a key reason credit notes are often required: they provide the formal document that explains why your taxable sales decreased.

Important practice: Use the correct tax codes on the cancellation document. If you issue a credit note, make sure it mirrors the tax treatment of the original invoice—same rate and tax classification—unless the correction is specifically about tax. This keeps your tax reporting consistent and reduces the chance of mismatched totals.

Also remember that if you operate across multiple regions or tax jurisdictions, you may need to consider where the supply was deemed to occur and which tax rules applied. For complex cases, it’s often worth involving an accountant or tax advisor, but even then your bookkeeping should be clean and well-documented so they can review efficiently.

Inventory and cost of goods sold implications

If your invoices relate to physical goods, cancellation can affect inventory and cost of goods sold (COGS). This is frequently overlooked because people focus only on revenue.

If goods were never shipped: You likely have no inventory movement to record. Cancelling the invoice should be enough, assuming you didn’t already post a shipment or “goods out” transaction in another system.

If goods were shipped and then returned: You may need both a credit note (to reverse revenue and tax) and an inventory adjustment (to bring the goods back into stock). Depending on your workflow, the return might be handled by a “credit note with items” feature or by a separate return process that posts inventory movements.

If you use perpetual inventory: COGS may have been recognized at the time of shipment. Cancelling or crediting the invoice may not automatically reverse COGS unless it’s tightly integrated with inventory modules. Check that your COGS and inventory valuation remain correct after the cancellation.

Even if you don’t track inventory in your bookkeeping system, you should at least ensure your operational inventory system and bookkeeping agree on what happened, so stock counts, margins, and profitability analysis aren’t distorted.

What if you already reconciled the invoice-related payment in the bank?

Bank reconciliation is where people get nervous, because they fear “breaking” a reconciled period. The good news is that you can usually preserve reconciliation while still correcting the invoice record—if you use proper credit notes and refunds rather than deleting transactions.

Best practice: Don’t delete or edit a reconciled bank transaction. Instead, create new transactions (like refunds) that reflect the real-world cash movement and reconcile those to the bank statement in the period they occur.

If you must correct something in a closed period (for example, you reported tax and closed the month), consider using adjusting entries or issuing the credit note in the current period according to your rules. The exact approach depends on your reporting requirements, but the guiding principle remains: preserve the audit trail and match the bank movements exactly as they occurred.

Handling numbering sequences and audit trail

Many bookkeeping systems and many regulatory environments expect invoice numbers to be sequential and unique. When an invoice is cancelled, that number should typically remain “used” and visible as cancelled/voided. Trying to reuse the number or removing it can create a numbering gap or duplication that invites questions later.

To maintain a solid audit trail:

Keep the invoice record: Mark it as cancelled/voided or link it to a credit note.

Record who and why: Use memo fields, reason codes, or internal notes. Include the date and a short explanation.

Keep supporting documents: Save the customer cancellation email, the returned goods receipt, or the revised contract. You don’t need to store every detail in the accounting system itself, but you should be able to retrieve the evidence if asked.

Be consistent: Consistency is a control in itself. If you always use credit notes for post-issue changes, it’s easier to explain your process and train staff.

Common mistakes to avoid

Here are the errors that most often cause confusion, messy accounts, or tax problems:

Deleting issued invoices: This can destroy the audit trail and create numbering inconsistencies. Even if your system allows it, it’s usually a bad idea unless the invoice never became official.

Creating manual journal entries without linking to the invoice: You might get the numbers right in the general ledger, but the customer ledger still shows an outstanding invoice. Your A/R aging becomes unreliable, and collections workflows break.

Voiding an invoice with payments applied: This can create strange negative balances or duplicated cash postings. Use credit notes and proper payment allocation instead.

Failing to adjust tax codes: If a credit note is issued without the correct tax treatment, your tax reports can be wrong even if your customer balance looks right.

Ignoring the reason and documentation: Months later, you won’t remember why invoice 1043 was cancelled. A short note saves time and protects you during reviews.

Not reviewing downstream reports: Always check A/R aging, sales summaries, and tax reports after cancellations. A “cancelled” status doesn’t always mean the accounting impact is fully reversed in every report configuration.

A practical internal policy you can adopt

If you want a simple policy that works for many small and medium businesses, here is a framework you can write into your bookkeeping procedures:

Policy 1: Draft invoices may be edited or deleted. Drafts are not official documents. However, if a draft number is reserved in sequence, it should not be reused unless your system explicitly supports safe reuse without breaking compliance.

Policy 2: Issued invoices are never deleted. Issued invoices are either voided (if issued in error) or credited (if the underlying transaction changed).

Policy 3: All cancellations require a reason note. The reason should be recorded in the invoice or credit note memo field, with a brief description and date.

Policy 4: Paid invoices are corrected via credit notes, not voids. Refunds or reallocations must be recorded as separate transactions that match the bank statement.

Policy 5: Tax treatment must mirror the original invoice unless the tax is the reason for correction. This keeps tax reports consistent and reduces errors.

Policy 6: Monthly review. At month-end, review a report of cancelled/voided invoices and credit notes, checking for unusual volume, missing reasons, or unallocated credits.

This policy gives you a repeatable method that scales as you grow, and it reduces the chance of ad-hoc decisions that create inconsistent books.

Examples to make the bookkeeping treatment concrete

Examples help you see how the logic works in real life. The exact buttons and screens depend on your software, but the accounting concepts stay the same.

Example 1: Duplicate invoice, unpaid

You accidentally issued invoice #1502 for 500, and the correct invoice is #1501. No payment received.

Best approach: Void invoice #1502 with a note: “Duplicate of #1501.”

Result: A/R and revenue recognition from #1502 is reversed. Customer balance remains correct. Invoice numbering remains intact and explainable.

Example 2: Customer cancels order after invoice is sent, unpaid

You invoiced 1,200 for goods, but the customer cancels before shipment.

Best approach: Depending on your rules, either void (if you treat it as an error to invoice before shipment) or issue a credit note (if the invoice was valid under your process but later reversed). Many businesses choose credit notes here because the invoice was legitimately issued and communicated.

Result: A/R returns to zero, revenue is reduced, and the cancellation is traceable.

Example 3: Invoice paid, then customer returns goods

You invoiced 800, the customer paid, then returned the goods.

Best approach: Issue a credit note for 800. Then refund 800 or leave it as a customer credit, depending on agreement.

Result: Revenue and tax are reversed via the credit note. Cash is handled through a refund transaction that matches the bank statement.

Example 4: Supplier bill cancelled and reissued

A supplier issued a bill for 2,000 with wrong details, then cancelled it and issued a corrected bill for 1,850.

Best approach: Record the supplier credit note (or void the original bill) to reverse the 2,000. Then record the new bill for 1,850.

Result: Accounts payable reflects only what you actually owe, and expenses are accurate.

How to keep your bookkeeping tidy after cancellations

Cancelled invoices can leave behind clutter: unapplied credits, mismatched customer statements, or confusing notes. Here are habits that keep things neat:

Regularly review unapplied credits: Credits sitting on customer accounts are liabilities (you owe value). Decide whether they should be refunded or applied to future invoices. Keep a recurring review list so credits don’t age indefinitely.

Re-run customer statements: If a customer had an invoice cancelled, send an updated statement showing the correct balance. It reduces confusion and prevents mispayments.

Close the loop on disputes: If the cancellation came from a dispute (pricing, quality, scope), record the reason clearly and ensure any internal process improvements are captured elsewhere (sales workflow, quoting, contract terms).

Use consistent naming: If your system allows reason codes, standardize them (e.g., “Duplicate,” “Customer Cancellation,” “Return,” “Pricing Error,” “Tax Code Error”). This makes reporting and training easier.

Separate operational and accounting fixes: If the real root cause is operational (wrong product shipped, incomplete service), fix that process too. Otherwise you’ll keep seeing the same cancellation patterns.

Reconciling cancelled invoices with management reporting

Management reports—sales performance, margins, customer profitability—can be distorted if cancellations are frequent or if they cluster in certain periods. A few reporting practices help you interpret your numbers correctly:

Track gross sales and net sales: Gross sales reflect the value of invoices issued; net sales reflect invoices after credits/cancellations. If net sales are much lower than gross, cancellations are a meaningful business signal.

Monitor cancellation rate: A rising cancellation rate might indicate quoting issues, product quality problems, delivery delays, or customer dissatisfaction.

Analyze by reason code: If most cancellations are “pricing error,” fix pricing controls. If “customer cancelled,” review lead qualification or contract terms.

Look at timing: If invoices are regularly cancelled in the next month, your month-end revenue might be inflated before corrections. That can mislead decisions about hiring, inventory, or marketing spend.

Bookkeeping doesn’t just keep score; it provides feedback to improve operations.

A simple checklist for each cancelled invoice

When you process a cancellation, use this quick checklist to ensure nothing is missed:

1) Status: Was it draft, issued, paid, partially paid?

2) Method: Delete/edit (draft only), void, or credit note?

3) Reason: Recorded clearly with date and short explanation?

4) Tax: Correct tax codes on void/credit note; tax report impact verified?

5) Customer/vendor ledger: Balance correct; no leftover receivable/payable?

6) Cash: If paid, refund or credit handled; bank reconciliation intact?

7) Inventory/COGS: If goods involved, stock and COGS corrected?

8) Documentation: Supporting evidence saved where you can find it?

This checklist is short, but it catches the most common problems and keeps your accounts reliable.

When to involve an accountant or bookkeeper for support

Many cancellations are straightforward, but some deserve professional input. Consider involving an accountant or experienced bookkeeper if:

You’re correcting invoices across closed periods: Especially if tax returns were already filed or financial statements were issued.

There are complex tax rules: Cross-border sales, mixed tax rates, exemptions, partial exemptions, or special schemes can make cancellations more complicated.

The invoice relates to long-term contracts or deferred revenue: Cancellation may impact revenue recognition schedules, not just A/R.

You’re seeing unusually high cancellation volume: This could indicate a control issue or fraud risk, and it’s worth tightening processes.

Even if you handle day-to-day bookkeeping yourself, a quick review of your cancellation policy can save time and reduce risk over the long run.

Putting it all together

Dealing with cancelled invoices in bookkeeping is about preserving truth and trail: your accounts should reflect reality, and your records should show clearly how you got there. Start by identifying the invoice stage (draft, issued, paid), choose the right tool (void vs credit note), and let your accounting system do the heavy lifting so customer balances, tax, and reporting stay aligned. Avoid deleting issued invoices or patching things with unlinked journal entries, and always document the reason.

If you build a consistent process—supported by a short checklist and a monthly review—you’ll prevent cancelled invoices from turning into lingering receivables, messy customer statements, or tax surprises. More importantly, you’ll have bookkeeping that you can trust, reports that make sense, and a clear record that stands up to scrutiny when someone asks, “What happened here?”