What is a Credit Memorandum?
A credit memorandum – often shortened to credit memo – 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 memorandum.
There is another type of credit memorandum that effectively does the same thing. A bank sends a credit memo after it increases an individual’s checking account in regard to a specific transaction.
- The most common type of credit memorandum (or credit memo) is issued by a seller and given to a buyer as a means to reduce the amount that the buyer owes.
- Credit memorandums 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.
Why are Credit Memorandums Issued?
Credit memorandums can be issued for a number of reasons. The most common reasons involve a buyer returning goods, a price dispute, or as a marketing allowance. The credit memo means that the party who made a purchase from the seller will not end up paying the entirety of what was owed at the time of purchase.
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.
If the buyer hasn’t paid the seller anything yet, they can only use the credit memo as a partial offset to the invoice. They will still be required to pay what is owed after the reduction specified in the memo.
In regard to recording a credit memorandum, the buyer records the memo in its accounts payable balance as a reduction. The seller, then, must also record the memo as a reduction, but it is a reduction of its accounts receivable (money coming in).
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