Credit Memo Know What it is and When to Use One

Sydney, NSW accounting services

If you have already issued a credit memo, you might be well aware of what it means. There might be business owners who didn’t need it even once. Or you might be losing opportunities by not knowing what it means and when to use it. So here, you will learn about the basics of a credit memo, the types, and its application.

Credit Memo – An Introduction

A credit memo is a note that a seller issues to the buyer as proof of reduction in sales. The memo gets an entry into the sales return journal and refers to the invoiced amount not paid (or received). It is of two types, one that a buyer gets from a seller and the other is issued by a bank. The seller-buyer memo marks an adjustment for the invoice. The one that comes from a bank is also termed a memorandum.

When to Use a Credit Memo?

Seller issues a credit memo to a buyer when the latter receives a different quantity or quality than the invoiced order. For instance, imagine restaurant orders fresh tomatoes for $500 to cover a day’s requirement. While the seller promises fresh produce, the transportation causes 10% damage. While the buyer receives only 90%, it also impacts the restaurant sales.

Here, the seller offers a $100 discount for the loss of produce and sales and issues a memo. The seller uses a seller’s credit memo as a credit to “Accounts Receivable” & “Sales Returns and Allowances” for $100. Similarly, the restaurant creates a $100 buyer’s credit memo as a debit to the Accounts Payable and inventory credit.

While things can be financially confusing, professional accounting services from Sydney, NSW can help ensure you issue the right amount and credit memos when needed.