Credit Memo
A credit memo is a document a seller issues to reduce the amount a buyer owes on an invoice. Sellers issue one for returns, short shipments, damaged goods, pricing errors, or agreed allowances. It references the original invoice and lowers the buyer's balance instead of refunding cash. Outside the US it is usually called a credit note.
When sellers issue a credit memo
The common trigger is a gap between what was invoiced and what the buyer should pay.
- Returned goods, usually against an RMA number
- Short shipment: the invoice billed more than the dock received
- Damaged or defective goods accepted at a discount
- Pricing error: the invoice price was above the PO price
- Promotional or volume allowances agreed with the buyer
- A retailer deduction the seller agrees is valid
Credit memo vs debit memo vs refund
Both memos adjust an existing invoice rather than replacing it.
| Credit memo | Debit memo | Refund | |
|---|---|---|---|
| Effect on buyer's balance | Decreases it | Increases it | None; cash goes back |
| Typical cause | Return, shortage, overcharge | Undercharge, added freight or fees | Overpayment already made |
| Issued by | Seller | Seller | Seller |
| EDI transaction | 812 | 812 | Payment, often ACH |
Credit memo example and accounting
A distributor invoices 100 cases at $20, a total of $2,000. The buyer receives 96 cases. The distributor issues a credit memo for 4 cases, $80, referencing the original invoice, and the buyer now owes $1,920. In the seller's books the credit memo debits sales returns and allowances and credits accounts receivable, so revenue and the receivable both drop by $80.
Credit memos in EDI
The EDI 812 Credit/Debit Adjustment carries credit and debit memos between trading partners, with the original invoice number and a reason code. Some retailers generate their own debit memos for deductions, so the 812 can arrive from either side.
Related Terms
Related Resources
Frequently Asked Questions
Yes. Credit memo is the common US term and credit note is common in the UK, EU, and elsewhere. Both reduce what the buyer owes.
No. A credit memo lowers the buyer's balance for future or open invoices. A refund returns cash that was already paid.
The seller issues it to the buyer, referencing the original invoice.
How to Answer "Are You EDI Capable?"
A buyer asked, and you need to answer this week. The four things they are checking, what you can say yes to today, and a realistic date for the rest.
- What a buyer is really asking when they ask this
- The minimum set-up that makes the answer yes
- What you can answer today versus what needs building
- Rough timelines, so you can give a date rather than a maybe
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