Credit memos are normally issued to

When was the last time you gave a customer a credit or discounted an item after you shipped it off to them?

Índice Show

What is a Credit Memo?
A Buyer's Credit Memo
A Seller's Credit Memo
How to Create a Credit Memo in QuickBooks Online.
Information Typically Recorded on Credit Memos
Why Would a Merchant Issue a Credit Memo?
Why It Is Important to Review Credit Memos
Learn More About Similar Accounting Topics:

Chances are, you deal with them often. It's not always just because you're a nice person or the client has been super supportive and they're getting a discount in appreciation.

Maybe it's because of a dispute, which means you probably want to get through with it and move on.

So we'll do exactly that.

In this blog, we'll show you exactly when it's appropriate to issue a credit memo in your books, as well as show you exactly how to issue one.

If you want to skip right to the how-to, click here.

What is a Credit Memo?

There are two types of credit memos: one is offered from a seller to a buyer.

The one that you'll most typically deal with is when you, the seller, have to issue a credit memo to the client and readjust an invoice that they still owe for.

Another is from a bank. This is called a memorandum, but we won't cover that in this blog.

Here's an example of when you'd need to create a credit memo:

A vendor to a restaurant delivers a bunch of tomatoes to a restaurant for $1000 for the whole shipment, along with a freshness guarantee.

10% of the tomatoes end up getting too cold in the truck and end up at the restaurant's door.

It would be easy to just discount 10%, but the vendor also realizes that losing those tomatoes also meant the restaurant underserved a couple of their menu items that day, due to the lack of product.

The restaurant and vendor come to an agreement that they'll discount the original invoice by $200 to compensate for the lost product and the lost revenue.

What a nice vendor to work with!

The vendor will have to create a seller's credit memo, and the restaurant will have to create a buyer's credit memo.

A Buyer's Credit Memo

The restaurant is going to be reducing their accounts payable (AP), as well as updating their inventory.

So we need:

1) A debit to Accounts Payable for $200; the restaurant isn't going to expect to have to pay for damaged goods.

2) A credit to inventory for $200, since there was a loss of the tomatoes.

A Seller's Credit Memo

1) A debit to Sales Returns and Allowances for $200

2) A credit to Accounts Receivable for $200, since they won't be receiving payment for that portion of the invoice.

How to Create a Credit Memo in QuickBooks Online.

Here's a video on how to create a credit memo.

We’re going to:

Create a credit memo.
Send to your customer
Apply memo to the invoice

Click "New" and find Credit Memo
Select the customer you want to give credit to
Select the products and services you want to give them the credit for, choose what item you'll be crediting them for (if it is for a specific item on the invoice) or create a new category. Then add in the amount of the credit you want to give them.
Now if you’d like to send to them, click save and send.
Apply a credit memo to an invoice

If a customer has an invoice with you already, the system will actually search out a specific line item. But, if the line item doesn't exist in an invoice, it will automatically attach to an open invoice.

You can certainly change which invoice the credit memo is attached to if it matters.

To see more videos, check out our YouTube channel.

Short for "credit memorandum" and also known as a credit note, a credit memo is a document that reduces a customer's or client's total account balance. Credit memos may be applied to future purchases of goods or services.

Unlike a refund, a credit memo does not remit money to the customer. While credit memos can be issued in conjunction with refunds depending on the incident, issuing a credit memo alone does not automatically entail sending the customer's money back.

Credit memos can be internal or external. External credit memos are sent to the buyer, informing them that they have a credit on their account, while internal credit memos are for account management purposes only and the buyer is not notified that they have a credit. Depending on the amount and how much goods or services the buyer plans to purchase, credit memos can reduce or eliminate the amount of their next purchase.

Information Typically Recorded on Credit Memos

While there is no uniform process for credit memos as different sales and account management systems have differences in how they are processed, credit memos will often contain the following information.

Information about the customer that is kept in customer relationship management (CRM) software such as their name and shipping address, billing address, preferred modes of payment, and customer account number may be on the credit memo so the record is easier to find for future transactions. If the company has a loyalty program in place, the loyalty account number may also be included. In cases where CRM solutions are not integrated with the company's accounting software, having as much information as possible about the buyer and their account details is important for accurately expediting credit memo remittance between the two programs.

The credit memo is likely to contain information about the purchase itself. Purchase order and invoice numbers should be included to provide as much context as possible for why the credit memo was issued, and facilitate updating the credit memo once the buyer uses it on a future purchase. The terms of the transaction should also be on the credit memo, such as net 30 but the customer is rewarded by paying within 15 days or less.

The purchase date helps contextualize the transaction and including item numbers or SKUs, product name or service description, prices paid, and quantities ordered should also be included on the credit memo.

The reason why the credit memo was issued to the buyer is also apt to be included with other transactional information.

Why Would a Merchant Issue a Credit Memo?

Credit memos are issued to buyers, and accepted by the buyer in place of a refund, for several reasons. Some retailers have a "no refund" policy and the buyer places an order fully aware of this. If they receive a defective product or items that are significantly different or in the wrong quantity, the seller may waive this policy and process a refund or issue a credit memo based on the purchase price.

If the seller does offer refunds routinely, credit memos may be issued in similar situations or because the buyer has been a customer for a long time and the company wants to appease them after a less optimal transaction. If a buyer buys an item right before it goes on markdown, the seller may issue a credit memo for the difference to entice future purchases. Internal credit memos may be used to offset future purchases from the customer, but also to write down currently outstanding balances, such as a store credit card or merchant credit agreement.

Why It Is Important to Review Credit Memos

At the end of the month, quarter, and year, the seller should review all outstanding credit memos and how they align with accounts receivable. If a top-down view is possible based on how CRM integrates with the accounting software, an aggregate dollar amount of these outstanding credit memos can help determine whether payments to vendors can be reduced as a result.

Correctly accounting for credit memos can also present the total receivables balance more accurately. If the company uses a factoring service to free up working capital or help fund expansions and other major purchases, accounts receivable serves as the primary collateral for this type of capital. Having a more accurate count of credit memos can provide more insight about the company's operations to the factoring company, and other external users such as banks, and help them properly assess how much capital they can offer.

Request a demo below to see how AccountingDepartment.com can assist you in putting your credit memos where they belong!

Written by Eddy Hood

Owners of small- to medium-sized businesses get orders from customers, send out invoices, receive payments, and deal with correspondence from vendors. In short, business owners have a wide variety of accounting matters that demand their time and attention. That's where expert accountants at Ignite Spot comes in. We have experience handling many types of bookkeeping tasks for small business owners. Our online services include assistance with accounts payable and receivable as well as credit card management, payroll, and more. Our firm of accountants can even help business owners at tax time. A credit memo is one example of a typical document that our accountants deal with. But what is a credit memo? Check out some information on credit memos and learn how they are used by businesses.

What is a Credit Memo?

A credit memo, or credit memorandum, is sent to a buyer from a seller. This document is issued to a buyer after an invoice is sent out. A credit memo may reduce the price of an item purchased by a buyer or eliminate the entire cost of an item. When a seller issues a credit memo, it's put toward the existing balance on a buyer's account to reduce the total. A credit memo is different from a refund. A customer who receives a refund for a purchase gets actual money back from the seller. Our knowledgeable accountants can help business owners with basic tasks such as issuing credit memos, keeping track of sales, and sending out invoices. Business owners who choose to have their accounting tasks outsourced to Ignite Spot are able to spend more time doing what they do best to boost company profits.

What Type of Information is on a Credit Memo?

A credit memo contains several pieces of important information. 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.

Reasons Why Credit Memos Are Issued

There are a variety of reasons why a seller may issue a credit memo to a buyer. One common reason is the buyer returns a purchased item to the seller. The item may be defective, the wrong size, or the wrong color or perhaps the buyer just changed his or her mind regarding the purchase. A price change is another reason why a seller may issue a credit memo. For instance, a buyer may purchase a product one day before its price is marked down 30 percent. The seller agrees to issue a credit memo for the difference between the price the buyer paid and the new sale price.

The professionals at Ignite Spot have the experience and know-how to handle the everyday accounting needs of a business. Simply fill out our short form and download our pricing instantly! Let our capable team of accountants take over the bookkeeping tasks for your business today. You'll be amazed how much time and money you can save with outsourced accounting.