What is a credit memo?

A credit memo, also known as a credit memorandum, is a document issued by a seller to a buyer. It serves as a notification that a credit has been applied to the buyer's account. Unlike a traditional invoice that requests payment, a credit memo reduces the amount the buyer owes.

Here's some key information about credit memos:

• Purpose: A credit memo is typically issued to correct an error on a previous invoice, grant an allowance, or provide a refund for returned goods.
• Common Reasons: Reasons for issuing a credit memo include price disputes, damaged goods, overcharges, early payment discounts not applied, or returns of merchandise.
• Content: A credit memo typically includes similar information to an invoice, such as the seller's and buyer's contact information, a credit memo number, the date, a description of the reason for the credit, and the amount of the credit. It also references the original invoice number being adjusted.
• Accounting Impact: Credit memos are important for accurate accounting. They reduce the seller's accounts receivable and either increase the buyer's accounts payable (if not yet paid) or create a credit balance that can be applied to future purchases.
• Relationship to Returns: When a customer returns merchandise, a credit memo is often issued to reflect the return and the associated reduction in the amount owed. This credit can be used toward future purchases or refunded.
• Documentation: Credit memos should be carefully documented and retained for audit purposes. They provide an audit trail of adjustments made to invoices.