What is Credit Memo? | Defination & Meaning

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what is a credit memo

A credit memo is popularly known as get credit memorandum which is a document produced and issued to a buyer by the seller after sending out the invoice of the sale transaction. The credit memos are generated to eliminate some or the entire value of an item mentioned in memo for the sale transaction. Credit memo is different from a refund as the customers get refund in monetary terms but in case of credit memo certain amount is reduced from the total on the buyers account.

In layman’s language, credit memo is a credit note or commercial document which is issued by a seller to buyer as an evidence to return sale transaction. It is reduction made in the total on the buyers account.

Credit memo includes items, quantities and price agreed to follow the sale transaction. Mainly, it highlights the goods returned or not actually received. This credit memo initiate reduction in the total mentioned previously generated invoices as to avoid confusion and unauthorized transaction. It also helps buyer to know actual amount he has to pay in future if, such sale transaction is on credit. It is basically issued in reference of the previously generated invoices with the reason mentioned for such reduction.

The reason possible for such reduction as mentioned in credit memo are as follow:

  • Where the transaction is incomplete.
  • Where the goods supplied are damaged.
  • Where the goods supplied r not as per the specifications mentioned in order.
  • Credit memo is offered when the customer has been over charged with amount he doesn’t have to pay.
  • Where the transaction has been completed but goods are not actually been delivered.

What are the facilities offered by the credit memo?

The credit memo allows a buyer to purchase any item or service possible from sellers end on some future date. Such future purchase could be offered in name of gifts or store credit. It is of also offered as an Goodwill gesture to the buyer when he wishes to return previously purchased good and thus, a credit memo is offered instead of cash refund.

The credit memo of offered may not be of actual value of the product returned as most of the time the sellers adjust the credit amount in another sale transaction followed by the same buyer as there may be a policy to exchange goods with another goods and not to generate cash refund.

How are credit memos different from debit memos?

  • Credit memo is generated when amount is to be reduced in amount receivables from the customer but debit memo is generated when any amount is reduced from amount payable to vendor because you send damaged goods to the vendor.
  • Credit memos are generated when amount charged why the vendor is too high or wrong as he may forgot to reduce the extra discount offered on the same item and these credit memos assigned only to:
  1. To single invoice
  2. Two partial amount of an invoice
  3. To several invoices
  • Debit memos are generated when amount calculated by the seller to the buyer is too low and the buyer has to pay the differentiated amount to the seller.