What is a credit memo?

A credit memo is a document a seller issues to reduce the amount a customer owes, usually because of a return, a pricing error, a discount or a billing mistake. It is the opposite of a debit memo and is also called a credit note.

How it works

Once an invoice is sent, you generally should not edit it, because both sides now have a record of it. Instead you issue a credit memo that points back to the original invoice and states the amount being removed.

A credit memo should show:

• A unique credit memo number and the date.
• The original invoice number it adjusts.
• The customer’s name and details.
• The reason, such as “returned item” or “price correction”.
• The line items or amount being credited, including any tax.
• The new balance, or a note that the customer holds a credit.

The credit can be used in three ways: applied against the open invoice, kept as store credit for the next invoice, or paid out as a refund. A credit memo lowers your accounts receivable because the customer now owes less.

Example

A tile contractor invoices a homeowner and later finds an overcharge.

You can check tax amounts with the sales tax calculator.

When to use one

1. A customer returns goods or cancels part of a job.
2. You find a pricing, quantity or tax error after sending the invoice.
3. You agree to a discount or goodwill reduction.
4. Goods arrive damaged and you owe an allowance.

If you simply need a fresh start, you can issue a credit memo for the full invoice and send a new, correct invoice. Create the replacement with the free invoice generator.

Related terms

• Debit memo: increases what a customer owes.
• Accounts receivable: the balance a credit memo reduces.
• Line item: a single charge on an invoice.
• Write-off: removing an unpaid invoice you will not collect.