What is a Credit Memo?

When was the last time you gave a customer a credit or discounted an item after you delivered the product to them?

Chances are, you deal with them often. And this is not just because you’re a nice person, or that you’re rewarding the client with a discount for their support and appreciation.

It is more likely because of a dispute, which means you probably want to get through it quickly and move on.

In this post, let’s discuss when it’s appropriate to issue a credit memo in your books, as well as effectively demonstrate how to issue one.

There are two types of credit memos: one is offered from a seller to a buyer.

The one that you’ll most typically deal with is when you, the seller, have to issue a credit memo to the client and readjust an invoice that they still owe for.

Another is from a bank. This is called a memorandum, but we won’t cover that in this post.

Here’s an example of when you’d need to create a credit memo:

A vendor to a restaurant delivers a bunch of chicken to an establishment for $2000 for the whole shipment, along with a freshness guarantee.

However, while in the truck, 10% of the chicken gets too cold, and ends up at the restaurant’s door.

It would be easy to only discount the 10%, but the vendor also acknowledges that the loss of these chickens also means the restaurant underserved a couple of their menu items that day, due to the lack of product.

The restaurant and vendor come to an agreement that they’ll discount the original invoice by $400 to compensate for the lost product and the lost revenue.

What a nice vendor to work with, right?

The vendor will have to create a seller’s credit memo, and the restaurant will have to create a buyer’s credit memo.

A Buyer’s Credit Memo

The restaurant is going to be reducing their accounts payable (AP), as well as updating their inventory.

So we need:

1) A debit to Accounts Payable for $400; the restaurant isn’t going to expect to have to pay for damaged goods.

2) A credit to inventory for $400, since there was a loss of the chicken.

A Seller’s Credit Memo

1) A debit to Sales Returns and Allowances for $400

2) A credit to Accounts Receivable for $400, since they won’t be receiving payment for that portion of the invoice.

How to Create a Credit Memo in QuickBooks Online.

We’re going to:

Create a credit memo.
Send to your customer
Apply memo to the invoice

Click “New” and find Credit Memo
Select the customer you want to give credit to
Select the products and services you want to give them the credit for, choose what item you’ll be crediting them for (if it is for a specific item on the invoice) or create a new category. Then add in the amount of the credit you want to give them.
Now if you’d like to send to them, click save and send.
Apply a credit memo to an invoice

If a customer has an invoice with you already, the system will actually search out a specific line item. But, if the line item doesn’t exist in an invoice, it will automatically attach to an open invoice.

You can certainly change which invoice the credit memo is attached to if it matters.

It’s no secret that the function of your financial activities provide you exclusive knowledge to make better informed business decisions, but all companies will face accounting and finance issues. Whether you wear the hat in maintaining your own finances, or you have a solid team in charge of everything accounting, our expert strategists at MCDA CCG are ready to help you where you need it. Our team of professionals have built a reputation for our cutting edge business advice, while tailoring our wealth of knowledge to meet your team.

If you’re ready to determine whether you should outsource all or parts of your financial operations, schedule your no-obligation, free discussion to connect with one of our experts at our headquarters in Placentia, Orange County, California, today!