Credit Memo
What Is a Credit Memo?
A credit memo is a document that shows a reduction in payments that a buyer owes a seller after an invoice or bill of sale is issued. As an abbreviation of the term credit memorandum, a credit memo often reflects a return or a price reduction on goods or services charged on an earlier invoice.
In bookkeeping practices, the seller must record a credit memo as a reduction in their accounts receivable balance, while the buyer subtracts it in accounts payable.
What Information Is Included in a Credit Memo?
The details in a credit memo allow a seller of goods and services to keep track of their income and inventory. In this way, the document serves as an important bookkeeping tool. A credit memo should include the following information.
- Purchase order (PO) number
- Date of purchase
- Shipping address
- List of credited items
- Quantities of items
- Method of payment
When Are Credit Memos Used?
A typical reason for issuing a credit memo is when a buyer returns a purchased item to the seller. The item may be damaged, defective, or the wrong size or color. Sometimes, the buyer has simply changed their mind and no longer wants the item.
Draft a Purchase Agreement Here
First example of a credit memo
Here’s an example. Let’s say a restaurant owner purchases 10 boxes of take-out containers. The seller issues a sales invoice for the 10 boxes priced at $20 each, or $200 total. However, before paying the invoice, the buyer finds that one of the boxes is damaged, and the containers inside are crushed. The seller issues a credit memo for $20.
In the seller’s bookkeeping records, the credit memo will show a debit of $20 to Returns and Allowances (Sales) and a credit of $20 to Accounts Receivable.
When the buyer notes the credit memo in their records, it reflects a debit of $20 to the restaurant’s Accounts Payables and a credit of $20 to Inventory or Returns and Allowances (Purchases).
Second example of a credit memo
Another situation that can prompt a credit memo is a price reduction. Perhaps the buyer purchased an item the day before a sale and has not used it yet. The buyer can request a credit for the price they paid for the item and the new sale price.
Banks and other financial institutions also use credit memos on their statements to indicate when a customer’s account balance has increased for a certain transaction.
What Is the Difference Between a Refund and a Credit Memo?
A credit memo is not the same thing as a refund. A refund involves the return of a cash payment when an invoice has been paid in full.
On the other hand, a seller can apply a credit memo to a buyer’s next order. The seller would record the credit on the next invoice template and make the necessary reduction at the time of the future invoice.
However, if the buyer already has paid the full invoice and prefers a cash payment instead of a credit on another order, they can ask for one.
Helpful Resources:
Oregon.gov - Credit Memo Guidance
AccountingTools - Credit memo definition
What Is a Credit Memo?
A credit memo is a document that shows a reduction in payments that a buyer owes a seller after an invoice or bill of sale is issued. As an abbreviation of the term credit memorandum, a credit memo often reflects a return or a price reduction on goods or services charged on an earlier invoice.
In bookkeeping practices, the seller must record a credit memo as a reduction in their accounts receivable balance, while the buyer subtracts it in accounts payable.
What Information Is Included in a Credit Memo?
The details in a credit memo allow a seller of goods and services to keep track of their income and inventory. In this way, the document serves as an important bookkeeping tool. A credit memo should include the following information.
- Purchase order (PO) number
- Date of purchase
- Shipping address
- List of credited items
- Quantities of items
- Method of payment
When Are Credit Memos Used?
A typical reason for issuing a credit memo is when a buyer returns a purchased item to the seller. The item may be damaged, defective, or the wrong size or color. Sometimes, the buyer has simply changed their mind and no longer wants the item.
Draft a Purchase Agreement Here
First example of a credit memo
Here’s an example. Let’s say a restaurant owner purchases 10 boxes of take-out containers. The seller issues a sales invoice for the 10 boxes priced at $20 each, or $200 total. However, before paying the invoice, the buyer finds that one of the boxes is damaged, and the containers inside are crushed. The seller issues a credit memo for $20.
In the seller’s bookkeeping records, the credit memo will show a debit of $20 to Returns and Allowances (Sales) and a credit of $20 to Accounts Receivable.
When the buyer notes the credit memo in their records, it reflects a debit of $20 to the restaurant’s Accounts Payables and a credit of $20 to Inventory or Returns and Allowances (Purchases).
Second example of a credit memo
Another situation that can prompt a credit memo is a price reduction. Perhaps the buyer purchased an item the day before a sale and has not used it yet. The buyer can request a credit for the price they paid for the item and the new sale price.
Banks and other financial institutions also use credit memos on their statements to indicate when a customer’s account balance has increased for a certain transaction.
What Is the Difference Between a Refund and a Credit Memo?
A credit memo is not the same thing as a refund. A refund involves the return of a cash payment when an invoice has been paid in full.
On the other hand, a seller can apply a credit memo to a buyer’s next order. The seller would record the credit on the next invoice template and make the necessary reduction at the time of the future invoice.
However, if the buyer already has paid the full invoice and prefers a cash payment instead of a credit on another order, they can ask for one.
Helpful Resources:
Oregon.gov - Credit Memo Guidance
AccountingTools - Credit memo definition