Accounting
Financial Management
What Is a Credit Memo? Definition, Example and Journal Entry
Last updated: October 9, 2026 · Independent guide · We do not sell rankings or coverage.
A credit memo is a document a seller issues to reduce what a customer owes on an invoice already posted, usually for a return, a damaged or short shipment, a pricing error or an agreed allowance. It lowers the seller’s accounts receivable and the buyer’s accounts payable but does not move cash. The original invoice stays on record, and the credit memo references it.
Credit memo definition
A credit memo, also called a credit note, is a formal adjustment document linked to a specific sales invoice. Oracle’s NetSuite documentation defines it as “a transaction that decreases the amount a customer owes you” (Oracle NetSuite Help, no date shown). It should carry its own number, the original invoice number, the reason, the quantity and price credited, and any sales tax reversed.
Sellers also issue one when a rebate is agreed after the sale or a billing dispute is settled in the customer’s favor. The customer can apply the credit to the original invoice, hold it against future invoices, or ask for a refund.
The seller and buyer record mirror-image journal entries:
| Party | Debit | Credit | Note |
|---|---|---|---|
| Seller | Sales returns and allowances (contra revenue); Sales tax payable | Accounts receivable | Tax line only if tax was charged and is refunded |
| Seller, goods returned to stock | Inventory | Cost of goods sold | Perpetual inventory, resalable goods only |
| Buyer | Accounts payable | Inventory, or the expense account originally charged | Periodic systems may use purchase returns and allowances |
Credit memo example
Illustration only. A distributor invoices a retailer $5,000 for 100 cases at $50, with no sales tax because the retailer buys for resale. Eight cases arrive crushed. The retailer returns them, and the distributor issues credit memo CM-1042 for $400, referencing invoice 7731. Each case cost the distributor $30, and the cases are repairable and go back to stock.
- Seller: debit Sales returns and allowances $400, credit Accounts receivable $400. Then debit Inventory $240, credit Cost of goods sold $240.
- Buyer: debit Accounts payable $400, credit Inventory $400.
- Result: both parties show $4,600 open on invoice 7731. If the retailer had already paid, the $400 sits as an unapplied credit until used or refunded.
If the sale had been taxable in California, the seller could exclude the returned amount from taxable receipts only by refunding or crediting the full price including tax, less permitted restocking costs (CDTFA Regulation 1655, amended 2014). Other states have their own rules.
Credit memo vs debit memo vs refund
A seller issues a debit memo to increase what the customer owes, for example to correct an underbilling or add a charge left off an invoice. A buyer can also send a debit memo to a supplier to record a claim such as a shortage, which reduces its payable. Check who issued a debit memo before posting it (Invoice Data Extraction, July 27, 2026; the publisher sells invoice extraction software).
A refund sends cash back. If the seller issued a credit memo first, the refund pays out the resulting credit balance: debit Accounts receivable, credit Cash. Issuing the credit memo first keeps the reason and the invoice link on record.
How credit memos are used in practice and in software
AR teams put a reason code on every credit memo so returns, pricing errors and allowances can be reported separately. If you expect returns, ASC 606 requires you to estimate them at the time of sale and record a refund liability and an asset for the goods you expect back (PwC Viewpoint, ASC 606-10-55-23, no date shown). Credit memos for actual returns then draw down that estimate.
- QuickBooks Online applies credit memos to open invoices automatically when the Automatically apply credits setting is on (Settings, Account and settings, Advanced, Automation). A delayed credit does not affect sales reports until applied (Intuit QuickBooks help, no date shown).
- Oracle NetSuite lets you apply a credit memo to open or future invoices through Accept Customer Payments. A credit memo created from a return authorization does not affect inventory, while a stand-alone credit memo does (Oracle NetSuite Help, no date shown).
- Microsoft Dynamics 365 Business Central can create a corrective credit memo directly from a posted invoice. Once an invoice is partly or fully paid, you cannot cancel or correct it from the invoice itself (Microsoft Learn, June 11, 2025). Get Posted Document Lines to Reverse always exactly reverses the costs of the original posted lines on a return (Microsoft Learn, March 5, 2024).
How we researched this
We reviewed the top-ranking pages for “credit memo” in October 2026, checked accounting against PwC’s ASC 606 guide and sales tax against California’s regulation, and took software behavior from vendor help pages. The example uses invented figures.
Related guides
- Amazon Seller Accounting: Settlements, Fees and Sales Tax
- Construction Accounts Payable: Pay Apps, Retainage, Holds
- Vendor Rebate Tracking Software for Distributors (2026)
Frequently asked questions
Is a credit memo the same as a credit note?
Yes. Both terms describe a seller-issued document that reduces a customer’s balance on an earlier invoice.
Does a credit memo reduce revenue?
Yes. The seller debits a contra revenue account such as sales returns and allowances, so gross sales stay visible and net sales fall. If returns were already estimated under ASC 606, the debit may go to the refund liability instead.
Who issues a credit memo, the buyer or the seller?
The seller issues it. A buyer that wants a credit usually raises a claim or sends its own debit memo, and the seller responds with a credit memo once it agrees.
Related terms
Sources
- Oracle NetSuite Help, Issuing a Customer Credit Memo, no date shown. docs.oracle.com
- Intuit, QuickBooks Online help article on credit memos and delayed credits, no date shown. community.intuit.com
- Microsoft Learn, Correct or cancel unpaid sales invoices (Business Central), June 11, 2025. learn.microsoft.com
- Microsoft Learn, Business Central guidance on processing sales returns, March 5, 2024. learn.microsoft.com
- PwC Viewpoint, Revenue from contracts with customers guide, 8.2 Rights of return, no date shown. viewpoint.pwc.com
- California Department of Tax and Fee Administration, Regulation 1655, Returns, Defects and Replacements, last amended 2014. cdtfa.ca.gov
- Invoice Data Extraction, Credit Memo vs Debit Memo, July 27, 2026 (publisher sells invoice extraction software). invoicedataextraction.com
Sherman Hsieh
Independent analysis of enterprise software — ERP, CRM and more
