Credit Memo How It Works And Why It Matters In Business

define credit memo

Most credit memos feature the purchase order (or PO) number, as well as the terms of payment and billing. The shipping address, a list of items, prices, quantities, and the date of purchase are other significant pieces of data found on a credit memo. All of this information helps a seller to keep track of inventory. This document also includes the reason for issuing the credit memo. Their purpose is to correct any sales situation that demands a reduction in the amount of goods or services sold previously. Credit memos are always tied to a previous invoice and they are normally used when a customer receives damaged goods, incomplete orders, or wrong products.

One mistake can cost you more than you expect and thus, the transactions need to be done carefully with attention and time. Another mistake several businesses have done is creating wrong credit memos. Unlike a refund which reverses a sale, a credit memo is issued after the original invoice and reduces the existing balance due. Upon receipt of the credit memo, the retailer would debit its accounts payable account to wipe out its liability to the vendor. This way the seller clears its receivable and the buyer clears its payable.

Terms Similar to Credit Memo

Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created to help people learn accounting & finance, pass the CPA exam, and start their career. This entry reflects the reduction in your receivables and your sales revenue. The concept of crediting an account can be confusing because a credit generally means a reduction in an asset account and the customer is actually getting an increase. This makes sense because the store is crediting its receivable and giving the customer a voucher to shop in the store. Software like InvoiceOwl offers to prepare credit memos within a few clicks.

A credit memo reduces the amount a customer owes, while a debit memo increases the amount owed. For open invoices where payment has not yet been made, the credit memo reduces the total amount owed by the customer. The credit memo customer then pays the net amount after deducting the credit. When the vendor sells ther retailer a piece of inventory on account, the vendor debits accounts receivable and credits cash in its accounting system.

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