Credit memo: meaning, example, journal entry and credit memo vs debit memo
A credit memo (credit memorandum) is a document a seller issues to a customer to reduce the amount the customer owes — because goods were returned, the customer was overcharged, a discount or allowance was agreed after the invoice, or an invoice was wrong. It refers to the original invoice and lowers the customer's balance in accounts receivable; the customer can use it against the next invoice or ask for a refund. A debit memo is the opposite: it increases what the customer owes. Below: a credit memo example and the fields to include, the journal entries for both sides, how credit memos, debit memos, credit notes and refunds differ, what "credit memo" means on a bank statement, and how to record it on the customer's account — including in Account Ledger by Ofisx.
Short answer
- Credit memo meaning: a seller's document that reduces what a customer owes on an earlier invoice — for returns, overcharges, damaged goods or allowances.
- Who issues it: the seller. The customer receives it and lowers its accounts payable by the same amount.
- Effect: seller's accounts receivable goes down (credit); the customer's balance on the seller's ledger goes down.
- Debit memo: the opposite — the seller increases what the customer owes, e.g. an undercharge or an agreed extra fee.
- Credit memo vs refund: a credit memo is a balance reduction; a refund is cash going back. A credit memo can be applied to the next invoice or refunded.
- On a bank statement: a "credit memo" is money added to your account by the bank (e.g. interest or a collected note); a "debit memo" is money taken out (e.g. a fee or a returned check).
When to issue a credit memo
| Reason | Example | Credit memo amount |
|---|---|---|
| Returned goods | Customer returns 10 of 50 boxes of tiles | Price of the 10 boxes (+ tax if charged) |
| Overcharge / pricing error | Invoiced $48 per unit instead of the agreed $45 on 100 units | $300.00 |
| Damaged or short delivery | Two cartons arrived broken; customer keeps the rest | Value of the two cartons |
| Allowance after the sale | Customer keeps slightly scratched goods for 10% off | 10% of the line |
| Volume rebate | Quarterly purchases crossed $20,000; 2% rebate agreed | 2% of qualifying purchases |
| Cancelled or duplicated invoice | The same delivery was invoiced twice | Full amount of the duplicate |
Do not use a credit memo to hide a bad debt: if a customer simply cannot pay, that is a write-off, not a credit memo — the reason matters to your books and to sales tax.
Credit memo example and what to include
A building-supply company issues this credit memo after a return:
| Field | Example |
|---|---|
| Title | CREDIT MEMO |
| Credit memo number and date | CM-0117 — November 9, 2026 |
| Seller | Northside Building Supply, address, phone |
| Customer | Mason Roofing, account no. 1042 |
| Original invoice | INV-1042 dated November 2, 2026 ($2,400.00) |
| Reason | Return of 10 boxes of ridge tiles, unopened |
| Lines | 10 × ridge tile box @ $36.00 = $360.00 |
| Sales tax (if charged on the invoice) | Reversed at the same rate as the original invoice |
| Total credit | $360.00 (+ tax where applicable) |
| How it will be used | Applied to INV-1042 — new balance due $2,040.00 by December 2, 2026 |
Number credit memos in their own series (CM-…), always quote the original invoice, and state how the credit is used — applied to an open invoice, kept as a credit for the next order, or refunded. That one line prevents most later disputes.
Credit memo journal entry (seller and buyer)
Using the $360.00 return above (tax left out to keep it simple):
| Who | Debit | Credit | Why |
|---|---|---|---|
| Seller (issues the credit memo) | Sales Returns and Allowances $360.00 | Accounts Receivable — Mason Roofing $360.00 | Revenue is reduced through a contra-revenue account; the customer owes less |
| Seller, if goods go back into stock (perpetual inventory) | Inventory $216.00 | Cost of Goods Sold $216.00 | Restocks the returned items at cost (example cost $21.60 per box) |
| Buyer (receives the credit memo) | Accounts Payable — Northside Building Supply $360.00 | Purchase Returns and Allowances (or Inventory) $360.00 | The buyer owes the supplier less |
The name "credit memo" comes from the seller's side: it credits the customer's receivable account. If the credit is later paid out as a refund, the seller debits Accounts Receivable (or a customer-credit liability) and credits Cash. Your accountant may use slightly different account names — the direction of the entries is what matters.
Credit memo vs debit memo vs credit note vs refund
| Credit memo | Debit memo | Credit note | Refund | |
|---|---|---|---|---|
| Issued by | Seller | Seller (or a buyer's debit note to a supplier) | Seller | Seller |
| Effect on what the customer owes | Decreases | Increases | Decreases | Settles a credit with cash |
| Typical reason | Return, overcharge, allowance | Undercharge, extra freight, agreed fee | Same as credit memo | Customer has a credit and wants the money |
| Where the term is used | US | US | UK, India, EU, Australia | Everywhere |
| Seller's entry | Dr Sales returns / Cr A/R | Dr A/R / Cr Sales or Revenue | Same as credit memo | Dr A/R or customer credit / Cr Cash |
Credit memo and credit note are the same thing under different names; "credit note" is the usual term outside the US and in VAT/GST rules. A debit memo is sometimes used instead of a new invoice for a small correction; many small businesses simply issue a supplementary invoice.
Credit memo and debit memo on a bank statement
Banks use the same words from their side of your account. Your deposit is a liability for the bank, so:
- Bank credit memo = the bank increased your balance: interest earned, a note or check the bank collected for you, a corrected deposit error, an incoming transfer.
- Bank debit memo = the bank reduced your balance: service fees, a returned (NSF) customer check, a check printing charge, an outgoing transfer.
- In a bank reconciliation, bank credit memos are added to the book balance and bank debit memos are subtracted from it, because the bank recorded them before you did.
A returned customer check shown as a bank debit memo also means that customer owes you again — put the amount back on the customer's account the same day.
Example: how a credit memo changes the customer's balance
Mason Roofing's account at Northside Building Supply:
| Date | Description | Charges | Credits | Balance |
|---|---|---|---|---|
| Nov 2, 2026 | Invoice INV-1042 (Net 30, due Dec 2) | $2,400.00 | $2,400.00 | |
| Nov 9, 2026 | Credit memo CM-0117 — 10 boxes returned | $360.00 | $2,040.00 | |
| Nov 20, 2026 | Payment — check 5531 | $1,000.00 | $1,040.00 | |
| Nov 27, 2026 | Debit memo DM-0009 — extra delivery fee agreed | $45.00 | $1,085.00 |
The customer now owes $1,085.00. On the next statement of account both memos appear as their own lines with their numbers, so the customer can match them to the documents they received. Keeping every document on one running-balance account is what a client ledger is for.
Ways to handle credit memos and customer balances compared
| Option | Best for | Credit and debit memos | Customer balance | Platforms | US App Store ratings (Oct 21, 2026) |
|---|---|---|---|---|---|
| Account Ledger by Ofisx | Small businesses that need each customer's balance right after returns and corrections | No credit memo document; you record the return or correction as a line on the customer's account with a note (e.g. "CM-0117") | Running balance per customer and per supplier; PDF statement | iPhone (US App Store); Android on Google Play in Turkey only | New in the US store — no ratings yet |
| Intuit QuickBooks | Businesses that invoice every sale in QuickBooks | Credit memo and refund receipt documents applied to invoices | Customer balances and A/R aging | iPhone, Android, web | 273,010 ratings, 4.7 |
| Zoho Books | Small businesses invoicing in Zoho | Credit notes applied to invoices or refunded | Customer balances; statements | iPhone, Android, web | 5,264 ratings, 4.8 |
| Wave | Very small businesses that invoice in Wave | Corrections made through invoices and transactions — check Wave's current options | Customer balances from Wave invoices | iPhone, Android, web | 6,665 ratings, 4.4 |
| Spreadsheet | A few customers | A row with a negative amount and the memo number | SUMIFS per customer | Any | — |
The options in detail
Account Ledger by Ofisx
Account Ledger keeps a ledger for each customer and supplier — sales and purchases on credit with a due date, payments, partial payments and returns — and shows each running balance. From the customer's card you can send the balance by WhatsApp or share the ledger as a PDF statement.
It does not create or number credit memo or invoice documents, post journal entries or handle sales tax — issue the document in your invoicing or accounting software and record its effect on the customer's balance here.
Intuit QuickBooks
QuickBooks creates credit memos and applies them to open invoices inside full accounting.
Zoho Books
Zoho Books uses credit notes for returns and adjustments in full accounting.
Wave
Wave combines invoicing and bookkeeping for very small businesses.
Spreadsheet
A sheet with date, document number, charges and credits per customer works for a few accounts; it gets fragile with partial payments and several people editing.
Credit memo rules that prevent disputes
- Always reference the original invoice — A credit memo without an invoice number is the first thing an auditor or a customer questions.
- Write the reason — Return, overcharge, allowance, rebate — the reason decides the accounting and the tax treatment.
- Use its own numbering — CM-0001, CM-0002 … separate from invoices, with no gaps.
- Say how the credit is used — Applied to an invoice, held for the next order, or refunded — in writing.
- Update the customer's balance the same day — So reminders and statements never chase money the customer no longer owes.
- Show memos on the statement — Each credit and debit memo as its own line, so the customer can reconcile.
Limits — what Account Ledger does not do
- Account Ledger does not create credit memo, debit memo or invoice documents, post journal entries or calculate sales tax.
- It does not send automatic email reminder sequences or take card payments; you send the WhatsApp reminder from the customer's card.
- In the US the app is on the App Store for iPhone; the Android version is on Google Play in Turkey only for now.
- It is a paid subscription after the free trial; the App Store shows current plans and prices.
Frequently asked questions
What is a credit memo?
A credit memo (credit memorandum) is a document a seller issues to a customer to reduce the amount owed on an earlier invoice, for example after a return, an overcharge, damaged goods or an agreed allowance. It lowers the customer's accounts receivable balance.
What is an example of a credit memo?
Northside Building Supply invoices Mason Roofing $2,400.00 on November 2, 2026. Mason returns 10 boxes worth $360.00, so on November 9 Northside issues credit memo CM-0117 for $360.00 referencing the invoice, and Mason now owes $2,040.00.
What is the journal entry for a credit memo?
For the seller: debit Sales Returns and Allowances and credit Accounts Receivable for the credit amount (plus restocking returned goods at cost if inventory is tracked). For the buyer: debit Accounts Payable and credit Purchase Returns and Allowances or Inventory.
What is the difference between a credit memo and a debit memo?
A credit memo reduces what the customer owes (returns, overcharges, allowances). A debit memo increases what the customer owes (undercharges, extra freight or agreed fees). Both reference an original transaction.
Is a credit memo the same as a credit note?
Yes. Credit memo is the usual US term; credit note is used in the UK, India, the EU and Australia and in VAT/GST rules. Both reduce the amount a customer owes.
Is a credit memo the same as a refund?
No. A credit memo reduces the customer's balance. If the customer has already paid in full, the credit can be applied to a future invoice or paid out as a refund — the refund is the cash payment that settles the credit.
What does credit memo mean on a bank statement?
It means the bank added money to your account outside normal deposits — for example interest, a note the bank collected or an error correction. A debit memo on a bank statement means the bank took money out, such as a service fee or a returned check.
How do I record a credit memo on a customer's account?
Add it as a credit line on the customer's ledger with its date, number and the invoice it refers to, so the running balance drops immediately and the next statement shows it. Accounting apps such as QuickBooks and Zoho Books create the document and apply it; Account Ledger by Ofisx records the return or correction on the customer's running-balance ledger on iPhone, with a free trial and then a subscription.