What is a credit memo?

In plain English

It reduces receivables and sales (and sales tax if charged). Apply it to an open invoice or refund the customer.

Unapplied credit memos are a common reason for aging errors.

Why it matters

A credit memo keeps your sales history honest. If you simply edit an old invoice down to a lower amount, the original sale disappears from prior reports and any period you have already closed changes. A credit memo records the reduction on its own date, with its own reason.

It also prevents collection mistakes. A customer who was promised a credit will not pay the full invoice. If the credit is not recorded and applied, the aging report shows them as late and you may chase money they do not owe.

Worked example

A customer returns a $250 item. A credit memo of $250 reduces the invoice balance.

How to handle it

1. Create the credit memo for the customer with the date, item, amount and a short reason.
2. Include sales tax on the credit if tax was charged on the original sale.
3. Apply the credit to the specific open invoice it relates to.
4. If the customer has no open invoice and wants money back, record a refund against the credit memo.
5. Check the aging report for customers with unapplied credits each month.

Common mistakes

• Issuing a area but never applying it, so the invoice still looks overdue and the customer shows both a credit and a balance.
• Editing a past invoice instead of issuing a credit, which changes sales in a period that may already be reported.
• Recording the refund as an expense instead of linking it to the area, which leaves an unapplied credit behind.
• Forgetting to reverse sales tax on the credited amount, which overstates sales tax owed.

Not the same as: Write-off

A credit memo reduces what a customer owes because of a return, error or agreed discount. A write off removes a balance you could not collect. See Write-off.

Go deeper

• Recording Customer Refunds, Credits and Chargebacks: How to book refunds, credit memos and card chargebacks correctly so sales, taxes and bank balances stay accurate and customer accounts stay clean.

Related terms

• Current assets: Assets expected to be turned into cash or used up within about a year.
• Current liabilities: Debts and obligations due within about a year.
• Cost of goods sold (COGS): The direct cost of the products or services you sold during a period.

Common questions

General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.