Some companies offer their customers the option to purchase goods or services for credit. It allows those companies to sell more items while allowing customers the facility to defer the payment. After a company delivers its goods or services, it will send the customer an invoice. The customer can pay for that invoice within an agreed period.
Sometimes, however, the invoice value may not be accurate. Similarly, customers may also return goods or have other issues with the delivery. These steps will prompt a reduction in the invoice price. Therefore, the company will issue a credit memo.
What is a Credit Memo?
A credit memo is a document companies issue to customers to reduce the invoice amount. It allows companies to decrease the amount owed to them by their customers through a written note. Unlike the invoice, the credit memo does not impact the sale process. Instead, a credit memo decreases the amount owed by a customer.
Companies issue a credit memo to reduce the amount for a specific invoice. Therefore, each credit memo also mentions the related invoice that it impacts. This memo can reduce a part or all of the amount for that invoice. Companies may issue credit memos for several reasons. Sometimes, customers may also request companies to issue a credit memo for a specific purpose.
Why issue a Credit Memo?
The primary purpose of a credit memo is to reduce the amount owed by a customer for an invoice. Therefore, a company may issue credit memos for various reasons related to the total on that invoice. Some of the common reasons to issue credit memos include the following.
- The company issued an inaccurate invoice to the customer.
- The company offers a reduction in the invoice as a part of its corporate relationship with the customer.
- The customer does not agree to the invoice amount issued by the company.
- The company offers a sales allowance through which customers can request partial refunds.
- The customer returned goods to the company as a part of the return policy offered by the company.
What does a Credit Memo include?
The format for a credit memo may differ from one company to another. However, most of these documents must mention some essential information. Beyond that, the company may add more details to these memos. Usually, credit memos will include the following information.
- A date.
- The customer’s name and address.
- The purchase order number.
- The invoices for which it reduces the money owed.
- The goods or services that it impacts.
- A note explaining why the company issued the credit memo.
What is the difference between a Credit and Debit Memo?
Credit and debit memos are the opposite of each other. Companies issue a credit memo to reduce the total amount owed for an invoice. However, a debit memo increases that amount. A debit memo allows companies to impose new charges on an invoice. These charges may relate to interest or other items.
Companies also issue debit memos for the same reasons used for credit memos. These documents have the opposite impact as the credit memo. Both of these memos are also relevant in the banking sector. However, they have the opposite impact in that case.
Conclusion
When companies sell goods or services on credit, they issue an invoice to the customer. Sometimes, they may adjust the amount owed for those invoices. For that purpose, companies use a credit memo. This document reduces the amount customers owe for an invoice. Companies issue these memos for several reasons, as stated above.
Originally Published Here: Credit Memo: Definition, Meaning, Examples, Journal Entry, Accounting, vs Debit Memo
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