Credit Memo

A Credit Memo is the opposite of an Invoice - it reverses revenue and reduces what the customer owes.

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Credit Memo Scenarios

Credit Memo can be created from three different sources:

Scenario	Source	Physical Return?	When to Use
From RMA	Return Authorization	Yes	Customer returned goods
From Invoice	Existing Invoice	No	Price adjustment, billing error
Standalone	None	Optional	Promotional credit, goodwill

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Credit Memo from RMA

When customer physically returns goods through the RMA process.

Flow

CREDIT MEMO FROM RMA
─────────────────────────────────────────────────────────────────

RMA → Item Receipt → Credit Memo
                           │
                           ▼
                    ┌──────────────────┐
                    │ CREDIT MEMO      │
                    │ (from RMA)       │
                    │                  │
                    │ Linked to RMA    │
                    │ Revenue reversed │
                    │ Inventory done   │
                    └──────────────────┘

What Happens

Action	Result
Create from RMA	Credit memo linked to RMA
Credit issued	Reduces what customer owes
Revenue reversed	GL entries reverse invoice

GL Impact

Account	Debit	Credit	Why?
Sales Revenue	$100		REVERSE revenue (Revenue ↓)
Accounts Receivable		$100	Reduce what customer owes (Asset ↓)
Inventory Asset*	$60		Goods back on shelf (Asset ↑)
COGS*		$60	REVERSE cost of sale (Expense ↓)

*If inventory items returned and COGS not already reversed at receipt

CREDIT MEMO GL EXPLAINED (FROM RMA)
─────────────────────────────────────────────────────────────────

Think: "Undo the sale"

Original Invoice:
  A/R           $100  Dr    (customer owes)
  Revenue             $100  Cr    (you earned)
  COGS          $60   Dr    (cost recognized)
  Inventory           $60   Cr    (goods shipped)

Credit Memo (REVERSES IT):
  Revenue       $100  Dr    (give back the revenue)
  A/R                 $100  Cr    (customer owes less)
  Inventory     $60   Dr    (goods back on shelf)
  COGS                $60   Cr    (reverse cost)

Net Effect: As if the sale never happened

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Credit Memo from Invoice (No Return)

When you need to adjust an invoice without a physical return - price corrections, billing errors, or discounts.

Flow

CREDIT MEMO FROM INVOICE (NO PHYSICAL RETURN)
─────────────────────────────────────────────────────────────────

Existing Invoice #INV-001
         │
         │  (Customer disputes price / billing error)
         │
         ▼
┌──────────────────────┐
│ CREDIT MEMO          │  ← Created from or linked to invoice
│ (No RMA needed)      │
│                      │
│ GL: Reverses Revenue │
│ Inv: No change       │  ← No goods returned!
└──────────┬───────────┘
           │
    ┌──────┴──────┐
    │             │
    ▼             ▼
┌─────────┐  ┌──────────────┐
│ APPLY   │  │ CUSTOMER     │
│ to Same │  │ REFUND       │
│ Invoice │  │              │
└─────────┘  └──────────────┘

When to Use

Scenario	Example	Action
Price correction	Customer was overcharged	Credit the difference
Billing error	Wrong quantity invoiced	Credit the excess
Agreed discount	Post-sale discount negotiated	Credit the discount amount
Damaged goods	Customer keeps goods, gets discount	Credit for damage

GL Impact

Partial Credit ($50 adjustment on $1,000 invoice):

Account	Debit	Credit	Why?
Sales Revenue	$50		Reduce revenue (Revenue ↓)
Accounts Receivable		$50	Customer owes less (Asset ↓)

CREDIT MEMO FROM INVOICE - NO INVENTORY
─────────────────────────────────────────────────────────────────

Original Invoice: $1,000
Customer disputes: "Price should have been $950"

Credit Memo for $50:
  Revenue       $50   Dr  ← Give back $50 revenue
  A/R                 $50   Cr  ← Customer now owes $950

Result: Customer balance reduced from $1,000 to $950
        No inventory change (goods were not returned)

Inventory Impact

None - No physical goods are returned in this scenario.

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Standalone Credit Memo

Create a credit memo without linking to any invoice or RMA - for promotional credits, goodwill gestures, or write-offs.

Flow

STANDALONE CREDIT MEMO
─────────────────────────────────────────────────────────────────

    (No Invoice, No RMA)
           │
           │  (Manual creation for special cases)
           │
           ▼
┌──────────────────────┐
│ CREDIT MEMO          │  ← Created independently
│ (Standalone)         │
│                      │
│ GL: Creates credit   │
│ Inv: Optional*       │
└──────────┬───────────┘
           │
    ┌──────┴──────┐
    │             │
    ▼             ▼
┌─────────┐  ┌──────────────┐
│ APPLY   │  │ CUSTOMER     │
│ to ANY  │  │ REFUND       │
│ Invoice │  │              │
└─────────┘  └──────────────┘

* Can include inventory items if goods are being credited back

When to Use

Scenario	Example	Inventory?
Promotional credit	Loyalty reward, store credit	No
Goodwill gesture	Customer complaint resolution	No
Write-off	Uncollectible balance	No
Damaged goods return	Goods returned outside normal process	Yes

GL Impact

Service/Non-Inventory Credit ($100 promotional credit):

Account	Debit	Credit	Why?
Sales Revenue (or Expense)	$100		Reduce revenue or record expense
Accounts Receivable		$100	Customer has credit balance (Asset ↓)

With Inventory Items ($100 credit with goods returned):

Account	Debit	Credit	Why?
Sales Revenue	$100		Reduce revenue (Revenue ↓)
Accounts Receivable		$100	Customer has credit (Asset ↓)
Inventory Asset	$60		Goods back on shelf (Asset ↑)
COGS		$60	Reverse cost of sale (Expense ↓)

STANDALONE CREDIT MEMO EXPLAINED
─────────────────────────────────────────────────────────────────

Scenario: Give customer $100 store credit as goodwill

Credit Memo:
  Expense/Revenue   $100  Dr  ← Cost of the goodwill gesture
  A/R                     $100  Cr  ← Customer has $100 credit

Result: Customer has -$100 A/R balance (credit to use)
        Can apply to future invoices or get refund

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Credit Memo Comparison

Aspect	From RMA	From Invoice	Standalone
Source	RMA record	Invoice record	None
Physical Return	Yes	No	Optional
Inventory Impact	Increases	None	Optional
Common Use	Returns	Adjustments	Credits
Complexity	High	Medium	Low

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Decision Guide

WHICH CREDIT MEMO PATH SHOULD I USE?
─────────────────────────────────────────────────────────────────

Is the customer returning physical goods?
│
├── YES ──▶ Credit Memo from RMA
│           (After RMA → Item Receipt process)
│           │
│           └── Inventory already received
│
└── NO ──▶ Is this related to a specific invoice?
           │
           ├── YES ──▶ Credit Memo from Invoice
           │           │
           │           ├── Price correction
           │           ├── Billing error
           │           └── Agreed discount
           │
           └── NO ──▶ Standalone Credit Memo
                       │
                       ├── Promotional credit
                       ├── Goodwill gesture
                       └── General write-off

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Next Steps

After creating the Credit Memo:

• Customer Refund - Process refund or apply credit
• Returns Overview - Back to overview