Credit Memo
A Credit Memo is the opposite of an Invoice - it reverses revenue and reduces what the customer owes.
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 |
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
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.
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
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 |
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
Next Steps
After creating the Credit Memo:
- Customer Refund - Process refund or apply credit
- Returns Overview - Back to overview