What is A Credit Memo? [Definition + How to Prepare Credit Memorandum]

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A credit memo is a term that you may or may not have heard but definitely used or have come across once in your business. So, without wasting any time, let’s find out what is a credit memo and what comes under a credit memo?

Definition of Credit Memo

A credit memo, also known as a credit memorandum, is a document issued by the buyer to the seller. It is issued to reduce the amount that buyer owed to the seller under the forms of earlier invoice sales.

The credit memorandum can be sent after an invoice is out. The document can be issued under a cash payment-based method or any other payment method. Moreover, in some industries, it is also known as a credit note.

Let me simplify it with an example:

You have gone to purchase multiple pieces of equipment, but later realize you do not need some of them; so you decide to return it back. While returning, the seller will give you a note about the payment deduction and about product details with a due date, that note is a credit memo.

Most credit memos are issued under the circumstances of owed, accounts payable, and reduce payments. Now, you must be clear with the credit memo, right? Let’s know when to issue it.

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When To Issue Credit Memo?

credit memorandum

A credit memo is issued under several circumstances where some amount of transaction occurred between buyers and sellers such as:

  • Defective items like rotten equipment
  • Wrong size, wrong piece of item, inaccurate color
  • Seller issues
  • Changes in actual money
  • Discount or negotiation
  • Goods are rejected over some issues

When a buyer has a credit memo, it means there are certain amount or payment which are being recorded. When a seller issued a credit memo, it means they have reserved a certain amount of buyers for future purchases or waved off the entire amount.

What should be included in a credit memo:

  • Purchase order number
  • Date of purchase
  • Shipping address
  • List of items
  • Method of payment
  • Quantities

This information help sellers to maintain track of inventory. Also, a credit memo assumes by inexperienced can create a problem in the existing balance sheet. If this is enabled by invoicing software, it reduces the aggregate dollar amount following the number of invoices outstanding.

“Do not forget to review open credit memos at the end of each report to check if the open accounts receivable is still linked.”

Do you know there are several business owners who misunderstood refunds as a credit memo?

Both terms have different meanings. For example, with a refund memo, you can return any piece of item and get your cash payment back. But whereas in a credit memo, you do not get the amount back and need to purchase something else in exchange for the credit amount.

Another thing you should not misunderstand is bank credit memos.

A bank credit memo is an item on a business bank statement that increases the company’s account balance. It is notified by a financial institution to the depositor that the account balance was increased.

Now, last but not least is understanding how to prepare a credit memo?

How to Prepare a Credit Memo?

Like accounting software helps to manage accounts, similarly, there is invoice software that helps to prepare and manage credit memos.

But thankfully, now we have access to invoice software. Invoice software like InvoiceOwl offers to create and manage credit memos within a few clicks.

And that was the wrap-on guide about credit memos, hope it clears your doubts and if you have a few doubts, let’s solve in it our frequently asked question segment.

Frequently Asked Questions
  1. What is meant by a credit memo?

    A credit memo is a shortened term of a credit memorandum, which is a document issued by the seller of goods and services to the buyers. It reduces payments that the buyer owes or the customer owes to the seller after the invoice is being sent.


  2. Is it a credit memo refund?

    No, the credit memo can’t be refundable. The documents imply partial or full refund where the amount is applied towards another order.


  3. How does a credit memo work?

    The credit memo or credit memorandums are issued after the buyer sent the invoice to the seller and reduce the original purchased price under buyer records.

Conclusion

Creating a credit memo manually was tedious work that consume a lot of time and efforts. But all thanks to InvoiceOwl that allows creating credit memos in just a few seconds, so businesses can save time and focus on other areas of the business. Without giving a second thought, and explore all the features and functionalities of the software.

InvoiceOwl

Create Professional Credit Memo Online Easily and Keep On Top of Your Finances

InvoiceOwl is a feature-rich invoicing app that helps small businesses, freelancers and contractors to create credit memorandom and notes on-the-go and get paid quicker!

Author Bio
Jeel Patel
Jeel Patel
Founder

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.

Canada

Ottawa (Overbrook)

CA