A credit note reduces or cancels an invoice that has already been issued.
Why not simply change the invoice
An issued invoice is a record the customer holds too. Editing or deleting it means the two copies no longer agree, and it breaks the sequence of invoice numbers, which is what makes the record checkable.
A credit note leaves the original intact and records the correction against it.
When one is used
The work was billed at the wrong amount.
Part of the work was not delivered, or was returned.
A goodwill reduction after a complaint — see complaint handling.
A duplicate invoice was issued.
What it is not for
Writing off a debt the customer simply has not paid. That is bad debt, and it is recorded differently because the reason matters: a credit note says the business was not owed the money, and a write-off says it was owed and will not collect it.
Treating one as the other understates revenue and hides the collection problem — see accounts receivable aging.
Scope changes
Where the work changed rather than the billing being wrong, the cleaner record is a change order agreed before the work, rather than a credit note afterwards.
Effect on the figures
Revenue in the period the credit note is issued, which may not be the period of the original invoice. A large credit note issued months later moves both periods, which is worth knowing when comparing them.