Credit MemoDefined along with Examples
What is a Credit Memo?
A Credit Memo, short for Credit Memorandum, is a document that is sent by sellers to reduce the balance of the customer and is usually applied to a customer’s existing balance.
When sellers complete a sale, they issue an invoice to the customer.
When there are adjustments to be made on the customer’s account, instead of issuing a refund (returning the money to the customer), a credit memo is instead sent to the customer, thereby reducing the balance payable to the seller.
What Type of Information is on a Credit Memo?
Being a commercial document, a Credit Memo holds several important information such as the Purchase Order #, terms and conditions of payment, and billing information.
Other information will also include the description of the item(s), price, quantity, date when purchase was made, billing information, the reason for issuing the credit memo, and other information that needs to be included in a credit memo.
The information contained in a Credit Memo will help sellers better track their inventory, if applicable.
Reasons Why Credit Memos Are Issued
There are many reasons why sellers need to issue a credit memo and they can include the following:
- Customer returns the goods because the item is defective, damaged, or it could be the wrong product delivered.
- There was an error in issuing the invoice which has resulted in the wrong amount being charged to the customer.
- Overpayment by the customer on the original invoice.
- A price change on the product.
Credit Memo Example
ABC Company is a shoe manufacturer and sold 1,000 pairs of shoes to X Corporation for $250 each pair.
An invoice for a total amount of $250,000 was sent.
Upon receipt of the invoice, X Corporation identified that 50 pairs were the wrong size and returned them to ABC Company.
Because of this, ABC Company sent a credit memo to X Corporation for $12,500 (50 pairs x $250).
The total amount payable by X Corporation to ABC Company will then be $237,500.
If the customer has already paid their outstanding balance, the Credit Memo can be applied to their customer account and used towards future purchases.