Definition: A credit memorandum, often called a credit memo, is a notification that from the sender indicating that it credited the recipient’s account in its records. In other words, it’s a way for seller to notify a buyer that his account was credited.
What Does Credit Memo Mean?
Don’t get this confused with a debit memo. The difference between these two memos can be kind of confusing for accounting students because it references the point of view of the seller or sender of the memo. The sender of the memo credits its own books. The receiver debits its books. This concept can be a little tricky without remembering this.
Let’s look at an example.
Think of it in terms of a transaction. Let’s assume a retailer is purchasing inventory from a vendor. When the vendor sells ther retailer a piece of inventory on account, the vendor debits accounts receivable and credits cash in its accounting system.
After a few days, the retailer realizes that it ordered the wrong product, so it returns it to the vendor. The vendor, in turn, issues the retailer a refund and credits its accounts receivable balance for the purchase price. The vendor then sends the retailer a credit memo notifying it that the account was credited and it doesn’t own any more money for the transaction.
Upon receipt of the credit memo, the retailer would debit its accounts payable account to wipe out its liability to the vendor. This way the seller clears its receivable and the buyer clears its payable.
See how it makes sense from the sender’s perspective? People get into problems with this concept when they start mixing up the sender and receiver. The sender of a credit memo always records a credit in its books. The receiver of a credit memorandum also records a debit.