Credit Memo

A credit memo, also known as ‘credit note’ or just ‘credits’, is a list indicating all the products or services that the seller has provided the buyer with, but the buyer did not receive or returned the product or denied the services. The credit memo essentially will eliminate or reduce the amount that the buyer has to pay to the seller with respect to the original invoice. The memo usually states the reasons of issuing such a note and/or references original invoice.

In other words, a credit memo is generally issued in order to adjust the errors caused in sales invoice. The seller erroneously may have quoted price higher than the actual price of the goods. Hence the seller generates a corrective note stating the errors and amount to be repaid to the customer. For example, an electronics goods seller may have sold a smart phone for $800 to a customer whereas the exact amount is $760. In this case seller issues a memo stating the error reason and a return receipt of $40.

The memo is mostly an inverse of the invoice. In invoice the seller claims the selling price of goods and gets money from customer whereas it’s opposite in case of memo where seller pays the money or coupons to customers. Many large retail outlets do not give money; instead give out coupons that may be valid for a month or year.

A credit note is divided into three major parts – the Header, Body and Footer. The header consist of seller’s letterhead with address, buyer’s name and contact details, reference original invoice number and a memo number to identify this memo. The body consists of product description stating the reason for issuing the note, quantity, correct price, and other details. The footer consists of the net amount to be credited to the customer, any taxes applicable and the seller’s official seal with signature.

Questions

• What is a credit memo?
• How is a credit memo different from an invoice?
• What does the credit memo consist of? Explain.