Think “credit reduces the balance, debit adds to it”. While they sound similar, credit and debit memos are distinctly different: Proper documentation and approvals are key when issuing credit memos to avoid disputes. The application of a credit memo should be agreed upon by both the buyer and seller.

Request a cash refund of the credit memo value.

Apply the credit memo amount to future purchases.

If a payment on the original invoice has already been made in full, the customer has two options: The customer then pays the net amount after deducting the credit.

How are Credit Memos Applied?įor open invoices where payment has not yet been made, the credit memo reduces the total amount owed by the customer. Overpayments: If a customer accidentally overpays an invoice, the seller can process a credit memo for the amount overpaid rather than issuing a cash refund.ĭiscounts or Allowances: Sellers may use credit memos to apply discounts, rebates, or other negotiated pricing allowances to reduce the total amount due from a customer.Ĭancellations: For cancelled orders or services, a credit memo can properly account for the reversal of the sale in the books. Pricing Errors: If an invoice contains incorrect pricing that overcharges a customer, the seller can send a credit memo to rectify the mistake and reduce the amount owed to the proper pricing.ĭamaged Goods: When a customer receives damaged, defective, or unsatisfactory products, the seller may issue a credit to account for the diminished value and compensate the buyer. This properly accounts for inventory and revenue reductions from the return. Returned Merchandise: When a customer returns goods that were previously purchased, the seller can send a credit memo to offset the value of the returned items. There are several common situations where businesses issue credit memos:

Unlike a refund which reverses a sale, a credit memo is issued after the original invoice and reduces the existing balance due. Key details on a credit memo normally include:

Define credit memo