Credit Memorandum – [Updated] Overview, Definition and Example

  • Credit Memorandum – [Updated] Overview, Definition and Example

    Posted by Kevin Young on October 25, 2022 at 3:42 am

    Summary (TL;DR)

    • Often shortened to ‘credit memo’
    • It is given to a customer by a seller that provides goods and/or services. The memo is issued as a way to reduce the amount owed by the customer. The deduction is taken from an invoice that was previously issued, which is the most common type of credit memo.
    • The most common type of credit memo is issued by a seller and given to a buyer as a means to reduce the amount that the buyer owes.
    • Credit memos are usually issued because of a price dispute or a buyer returning goods.
    • If a buyer has paid the full amount owed, they can either use the credit memo to offset future invoices or demand a cash payment; a buyer who hasn’t paid can only use the credit memo as a partial offset, but they are still required to pay the amount owed after the reduction.

    Example of a Credit Memo

    Assume that Seller Company had issued a sales invoice for $400 for 50 units of product that it shipped to Buyer Company at a price of $4 each. Buyer company informs Seller company that one of the units is defective. Seller company will then issue a credit memo for $4.

    The seller should always review its open credit memos at the end of each reporting period to see if they can be linked to open accounts receivable. If this is allowed by the accounting software, it reduces the aggregate dollar amount of invoices outstanding, and can be used to reduce payments to suppliers.

    Credit Memos from the Bank

    A bank credit memo is an item on a company’s bank account statement that increases a company’s checking account balance. The bank adding interest that was earned for having money on deposit, The bank having collected a note for the company and A refund of a previous bank charge; are the examples of Bank Credit Memo in a Bank Reconciliation.

    Since the amount of the bank’s credit memo has already been added to the bank’s balance, the bank reconciliation will not reconcile unless the amount is also included in the company’s general ledger Cash account. To record the bank credit memo the company will debit Cash and credit another account.

    Types of Information on a Credit Memo

    A credit memo contains several pieces of important information. Most credit memos feature the purchase order (or PO) number, as well as the terms of payment and billing. The shipping address, a list of items, prices, quantities, and the date of purchase are other significant pieces of data found on a credit memo. All of this information helps a seller to keep track of inventory. This document also includes the reason for issuing the credit memo.

    How Credit Memorandums are Settled

    If a buyer has paid the full amount of the invoice, they have two choices to settle a discrepancy in their favor. One option is to use a credit memorandum toward any future payments they may make to the seller. Also, the buyer can instead ask for a cash payment based on what the seller owes the buyer.

    Kevin Young replied 1 year, 8 months ago 1 Member · 0 Replies
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