Credit Memos are used to correct errors made in a sales invoice that has already been sent to a customer. This type of document functions as an invoice with a negative amount.
When to Use a Credit Memo
A credit memo 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
Example Credit Memo
It's common to use a pre-formatted form like the sample credit memo shown here to document this type of correction. Your bookkeeping system may have built-in form. If not, you can download and save this document, then edit it to meet your needs. Just click the image and the memo will open in a new tab or window as an editable PDF. If you need assistance with the document, review this guide to printables.
Credit Memo Format
You could also create your own credit memo using a standard credit memo format, which typically includes three main sections (header, body, and footer).
The phrase '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. The header section generally 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.
- Serial Number: These accounting forms should 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.
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.
The footer provides the financial details of the entire transaction at a glance. Include:
- Total amounts of individual items
- Amount of sales tax and the total after tax
- Comments that apply, like when the deduction will be applied
Tools to Create Your Memo
Credit memos and related forms, such as debit 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. For example, if you use an accounting software package, you will be able to make a credit memo journal entry, and the program will make adjustments as needed, based on how your system is set up.