Credit Memo

When to Use a Credit Memo

A credit memo functions as an invoice with a negative amount and is used when an invoice has already been mailed to a customer and you need to apply a credit to their invoice. With this document, you will have the options of either applying the credit to other invoices in the client's ledger or dispersing a refund check. This form of correspondence is used to document overcharges or other errors such as:

• Incomplete shipment
• Unit price overcharges
• Wrong items shipped
• Goods rejected or returned
• To apply discounts after shipment

Credit Memo Format

Credit memo format is divided into three main sections:

• Header
• Body
• Footer

The Header

The header section includes:

• Contact Information

The header section of a credit memo starts with contact information like your business name, address, phone number, e-mail address and even your website if you have one. The words Credit Memo should appear at the top of the page. If your business is registered to bill for and collect tax, your Tax Registration number usually appears just below the words Credit Memo at the top of the page.

• Serial Number

These accounting forms should also be numbered with running serial numbers to help track, file and to provide an easy reference if your customer calls and wants to discuss the contents and terms of the memo.

• Date

The date issued acts as a handy reference.

• Payment Terms

Make it clear how and when payment will be made. For example: Cash, 30 days, COD, etc.

• Customer Reference Number

Not every credit memo includes a reference number. Some companies just use the memo’s serial number for reference. Follow your company’s procedure. If customers are assigned a number, you’ll include this in your memo.

• Sale Invoice Number

Include a reference number to the sales invoice being adjusted.

• Customer Name and Address

Include the customer name and address in the header section.

Body

The body of a credit memo consists of a description of why the document is issued. Be sure to indicate the invoice number you are referring to and relevant information about the error being addressed. List the correct pricing, product type or quantity and the net amount that should be credited to the customer.

Footer

The footer provides the financial details of the entire transaction at a glance. Include:

• Total amounts of individual items
• Amount of tax and the total after tax
• Comments that apply, like when the deduction will be applied

Tools to Create Your Memo

Credit memos can be created using a word processing program, spreadsheet, templates or software program. The drawback to using these systems is that they do not allow you to easily adjust inventory or track if the net amount has been deducted from the receivable account unless the software is designed with these features. Specialized software is designed to overcome these limitations.