People will often confuse a credit memo with a refund. Also, it can be used to address customer complaints that can otherwise be sorted out by awarding credit or discounts in an easy and fast way without having them return products. Tip: A credit memo can also be utilized to identify recurring issues associated with a specified product, such as defects, insufficient packaging, etc. Bank Y can issue a credit note stating that the depositor’s account has been credited the specified amount as interest earned from their money. Company A should then reduce the same amount from their accounts receivables.Įxample 2: Bank Y has been holding a depositor’s money for a specified interest for one year under an agreement that the bank will deposit the interest earned to the depositor’s account after the twelve months. Company A should issue a credit memorandum to ask Company B to reduce their quotation by the mentioned amount. As a result, Company A has lowered its pricing of good X. The production cost of good X has been reduced due to reduction in the cost of raw materials. They have an arrangement where Company A supplies a specified amount of good X every month. Since most jurisdictions do not allow sellers to edit invoices after they have been issued, a credit memo becomes of great importance in situations where there is a need to accommodate price changes without doing away with the initial invoice.Įxamples of a credit memo in different scenarios:Įxample 1: Company A has been in business with company B for a long.

Credit memos can reduce the invoiced amount before or even after payment. This is of grave importance at the end of each reporting period (monthly, quarterly, or annually) to identify any open receivable accounts by maintaining a proper audit trail. A credit memo is kept as a record of the consequential reduction of his or her accounts receivable balance. In addition, a seller would be necessitated to reduce an already quoted price, which will be further discussed later in the article. The primary reason why a seller would be prompted to use a credit memo is when they want to offset the price they quoted for specified goods and services to a customer, such as to correct an invoice error. Credit memos are issued to serve different purposes within a business.

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