Last editedApr 20232 min read
Knowing the differences between a credit invoice vs credit memo is important for keeping the books balanced, but many business owners may be unaccustomed to these specific terminologies.
It can be difficult getting to grips with all the accounting jargon out there, especially if you have just started a new business. It’s a good idea to take it one step at a time to build your knowledge up from a solid foundation, so here we will explain what a credit memo is and the differences between a credit memo vs invoice.
What is a credit invoice?
A credit invoice (or just ‘invoice’) lists the products or services that a customer is paying for and how much they must pay. Invoices should be itemised with the subtotal of each item listed next to the item, with the grand total of all items plus taxes and other fees at the bottom.
Some business agreements may be easy to conduct by simple verbal agreement, it is still important to invoice correctly. The reasons for always invoicing include:
to maintain accurate accounting records
ensuring goods and services are paid for
So, credit invoices are how a business informs their customers how much they need to pay for whatever goods or services have been rendered, and are legally binding documentation of the transaction of said goods or services.
Sometimes, however, the customer may have already paid an agreed amount only for the goods or services actually rendered to come in at a lower cost than the customer already paid. That’s when you need to write a credit memo.
What is a credit memo?
Short for ‘credit memorandum’, a credit memo is also known as a credit note. You may encounter entire articles online explaining the difference between credit note vs credit memo, but they are exactly the same thing and each term is interchangeable with the other.
The significant difference lies between credit invoice vs credit memo, and it is important to understand this difference. In basic terms, a credit memo is an accounting document that you issue to a client or customer to notify them of a positive balance in their account with your business.
Credit memo example
A simple credit memo example is a business that estimated a service to cost $1,000 AUD to the customer, who then paid the full amount upfront. However, the service turns out to actually only cost $950 AUD, so now the business must issue a credit memo or credit note to the sum of $50 AUD to address the imbalance.
Another basic credit memo example would be when a customer returns a product they are dissatisfied with after a purchase. One option for the business is to issue a credit memo to the sum of the product’s cost, allowing the customer to spend that amount on a new purchase.
Other credit memo examples include:
any instance of a customer demanding a refund
settling any pricing disputes with customers
paid-for services being modified and reduced in scope
as part of an invoice factoring process
How to write a credit memo vs invoice
The only special addition to a credit memo over an invoice is a unique identifying credit memo number. Otherwise the documents appear similar and include both the business and the customer’s information and the original invoice number or purchase order number. That way, both parties know which invoice the credit memo relates to.
The items listed on the credit memo need only be the adjusted or modified items, with the invoice’s total amount due replaced by the positive balance owed by the business to the customer. It is also a good idea to list the options available to the customer, such as receiving a full or partial refund, or having the positive balance credited towards the customer’s next purchase.
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