Credit Memo In Quickbooks. What Is It And How To Use It

If you own a small or medium-sized business, there are a wide variety of expense-related documents and forms that you’ll have to deal with directly. One of these documents is a credit memo. While this term may sound vaguely familiar, you may be unsure of what a credit memo actually is and how to use one. Contrary to how it sounds, credit memos have nothing to do with credit cards or traditional lines of credit.  Luckily Quickbooks makes it easy to fill out, send and keep track of your credit memos. In this article, we are going to cover the basics and give you everything you need to create a credit memo in Quickbooks. 

What is a Credit Memo

Before you fill out or send a credit memo, you’ll have to know the answer to one very important question; what is a credit memo? Essentially, a credit memo is a document that outlines a partial or full discount towards an item or service already purchased.   The memo serves as a record of reduced accounts receivable, while the buyer keeps the memo as a record of reduced accounts payable. In the case of the seller, it’s important to review all open credit memos at the end of the month as it can affect the aggregate dollar amount of invoices outstanding in your bookkeeping. 

When To Use Credit Memos

Credit memos are issued by the seller of a product or service after an invoice has already been sent out. This can occur for a number of reasons, including:

• Returns 
• Reduced Price 
• Marketing Allowance

Let’s take a closer look at each of these scenarios. 

Returns

In some cases, customers may return an item received by a seller. This can be due to a defective product or if a customer received the wrong color, size, or product type. Furthermore, if a customer changes their mind on their purchase, they may also request a credit memo. 

Reduced Prices

Sometimes the prices of a product or service may be lowered moments after a buyer makes a purchase. In this case, a buyer may request a credit memo to cover the difference between the two prices. 

Marketing Allowance

In some cases, a seller may issue a customer a credit memo if they promote or market their product. The amount credited will depend on sales turnover or a fixed amount related to marketing costs.  

Breaking Down The Lingo

Even in this brief description of when to use credit memos, there is a fair amount of financial lingo that may lead to more questions than answers. So before we move on, let’s look at some key terms that will help understand how credit memos work and how they apply to the many aspects of managing your finances. 

Accounts Receivable

In very simple terms, accounts receivable is the money owed from a buyer to a seller for a product or service. Accounts receivable or AR, as it is often abbreviated, refers to payments made through credit rather than cash. Since the actual payment has not been made yet, a credit memo can modify the amount due or the “accounts receivable.” 

Accounts Payable

Accounts payable is basically the opposite of accounts receivable. They are the costs of goods that a buyer owes a seller for goods and services received but not yet paid for. These debts must be paid by a certain deadline to avoid default, which comes with its own set of consequences. 

Invoice / Outstanding Invoice

An invoice is a document sent from a company to a buyer, outlining all of the services or purchases provided by that company and the amount that the buyer has to pay for those services. This invoice lists the terms of the transaction, as well as the date the payment is due.  Outstanding invoices are invoices that have been sent from the business to the buyer but have not been paid yet. This is different from an overdue invoice, which is when a buyer fails to pay the agreed dollar amount by the due date specified on the invoice. 

Difference between Credit Memos and Refunds

Credit memos, also known as credit memorandums , are often confused with refunds. These two terms, however have some key differences. Let’s take a look at how refunds differ from credit memos.  A credit memo simply affects the amount that the buyer owes the seller. In this case, the seller isn’t giving the buyer back any money. They are simply just charging less and will, in turn, receive less money.  However, in the case of a refund, the seller is handing over a cash amount to the buyer after the transaction has been made. This is done when a product is already paid for but is faulty, an incorrect purchase, or doesn't live up to a customer's expectations. In Quickbooks, issuing refunds and credit memos require separate actions and are also recorded differently. 

What Information Is Needed For a Credit Memo

When filling out a credit memo, there is some key information you’ll need to include. This information helps both the buyer and the seller keep track of inventory and update their financial bookkeeping. Credit memos typically include: 

• PO Number or Purchase Order Number 
• Terms of payment and billing 
• Shipping address 
• List of Items 
• Prices 
• Quantities
• Date of purchase
• Reason for issuing a credit memo 

Getting To Know Quickbooks

Since small business owners have so many projects to tackle, many use digital software like Quickbooks in order to manage all of their bookkeeping and accounting. Quickbooks is software developed by a tech company called Intuit and is used by millions of small to medium-sized business owners. With Quickbooks, you can keep accounting books, manage and pay bills, send invoices, and much more, all in one centralized place.  A great thing about having all of these functions integrated into one software is that Quickbooks can automate many aspects of your finances and automatically update your balances based on your transactions. Additionally, through Quickbooks, you can generate credit memos and apply them directly to your invoices. 

Step By Step Instructions

If you need to generate a credit memo, doing so in Quickbooks can save you both time and money, with no accountant needed. 

1. First, open Quickbooks and click on the “+ New” button at the top left of your page. If you don’t have this button, click on the “+” button located on the top right of the menu bar near the cogwheel button. 
2. Once you’ve done this, the new transactions menu will pop up with four columns. Under the “Customers” column, select “Credit Memo.”
3. When you click on this, a template will pop up, with fields allowing you to put in all of the information specified above. It is important to make sure that this information matches the previously entered invoice that this is going to be applied to. 
4. Once all of the information has been entered, click on “save and close” at the bottom of the screen.

Once all of this is entered, it is important to check your open invoice report and make sure that your newly generated credit memo is included. The credit memo will appear on your open invoice report until it is applied.  Typically, credit memos are applied at the moment that invoices are paid. Next, let’s go over how to apply the credit memo to an invoice that is being paid:

1. First, open Quickbooks and click on the “+ New” button at the top left of your page. If you don’t have this button, click on the “+” button located on the top right of the menu bar near the cogwheel button. 
2. In the new transactions menu, select “Receive Payment” in the “Customers” column.  
3. A page will pop up with the option to enter the date and customer from which the payment is being received. Once you enter the name of the customer, all of the invoices associated with that customer will pop up. Below the invoice section, there will be another section listing all unapplied credit memos.
4. Check off the boxes next to both the invoice that is being paid and the credit memo that is applicable to that invoice. This tells Quickbooks that the credit covers part of the payment from the invoice. 
5. Once this is done, click “save and new” at the bottom of the window. 

Final Thoughts On Credit Memos

Credit memos are an extremely useful tool for small businesses, as they make it easy to make adjustments to any invoices that have to be modified while keeping all of your balances accurate and in check. With QuickBooks, filling out and applying credit memos is even easier.  We hope that with the information above, you will successfully be able to efficiently use credit memos in Quickbooks so that you can get back to doing the things that matter most in running your business.  Sources: Quickbooks | All things accounting. All in one place. Corporate Finance Institute | Credit Memorandum Investopedia | Accounts Payable Investopedia | Accounts Receivable