What is a Credit Memo?

| 2 min read

A Practical Guide to Credit Memos?

When was the last time you gave a customer a credit or discounted an item after you shipped it off to them?

Chances are, you deal with them often. It's not always just because you're a nice person or the client has been super supportive and they're getting a discount in appreciation.

Maybe it's because of a dispute, which means you probably want to get through with it and move on.

So we'll do exactly that.

In this blog, we'll show you exactly when it's appropriate to issue a credit memo in your books, as well as show you exactly how to issue one.

If you want to skip right to the how-to, click here.

What is a Credit Memo?

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 blog.

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

A vendor to a restaurant delivers a bunch of tomatoes to a restaurant for $1000 for the whole shipment, along with a freshness guarantee.

10% of the tomatoes end up getting too cold in the truck and end up at the restaurant's door.


Credit memo for bad tomatoes

It would be easy to just discount 10%, but the vendor also realizes that losing those tomatoes also meant 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 $200 to compensate for the lost product and the lost revenue.

What a nice vendor to work with!

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 $200; the restaurant isn't going to expect to have to pay for damaged goods.

2) A credit to inventory for $200, since there was a loss of the tomatoes.

A Seller's Credit Memo

1) A debit to Sales Returns and Allowances for $200

2) A credit to Accounts Receivable for $200, since they won't be receiving payment for that portion of the invoice.

How to Create a Credit Memo in QuickBooks Online.

Here's a video on how to create a credit memo.


We’re going to:

  • Create a credit memo.
  • Send to your customer
  • Apply memo to the invoice
  1. Click "New" and find Credit Memo
  2. Select the customer you want to give credit to
  3. 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.
  4. Now if you’d like to send to them, click save and send.
  5. 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.

To see more videos, check out our YouTube channel.


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