What is a Credit Memo?

//What is a Credit Memo?
What is a Credit Memo? 2017-10-02T07:56:53+00:00

Definition: A credit memo, also called a memorandum, is a document issued by a seller that reduces the amount owed by a client from a previous invoice. This means that whatever the client owes to the seller will decrease after this memo is issued.

What Does Credit Memo Mean?

What is the definition of credit memo? Credit memos are widely used across many industries. Their purpose is to correct any sales situation that demands a reduction in the amount of goods or services sold previously. Credit memos are always tied to a previous invoice and they are normally used when a customer receives damaged goods, incomplete orders, or wrong products. They are also issued if some products were returned for warranty purposes; and, sometimes, they are used to give the client a previously-negotiated discount or to correct any mistake on the invoice.

Let’s see how this looks in a real-life business situation.

Example

Mr. Edward bought some clothes from Clothing Suppliers, LLC. The company’s return policy is that they will accept returns within 15 business days after the purchase is made. Returns will be reimbursed in the form of store credit only. Cash refunds are not permitted.

The day after the purchase, Mr. Edward found out that one of the pieces he bought had a big stain on it and decided to return it to the store. The Store Manager took over the situation and assured Mr. Edward that they will accept his return. What should the manager do in this case?

In this scenario, a credit memorandum should be used since the company needs to reduce a previously issued invoice to compensate the client for the damaged goods. After issuing the memo, Mr. Edward’s account at Clothing Suppliers, LLC will be credited with the total amount paid for the goods being returned and he can use that positive credit buy a different clothing piece or to exchange the current one for another one of the same model.

The concept of crediting an account can be confusing because a credit generally means a reduction in an asset account and the customer is actually getting an increase. This makes sense because the store is crediting its receivable and giving the customer a voucher to shop in the store.

Summary Definition

Define Credit Memo: Credit memorandum means a reduction in an invoice to a customer.