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What Is a Credit Memorandum?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 October 2014
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Usually known simply as a credit memo or credit note, the credit memorandum is a document that is created by a seller as a means of tracking any credits extended to a buyer or customer. The memo is often used by commercial businesses as a means of adjusting the balance due on an invoice or on a customer’s account in general. A credit memorandum is also often employed by banks to document adjustments to the balance in a depositor’s account that took place due to a factor other than the customer making a deposit.

In all its applications, the credit memorandum serves as the means of tracking changes to a customer account, usually in the form of adjustments to an invoice. The adjustments usually have to do with changing the amount due on an invoice because the buyer did not receive what was ordered, or the item was unsatisfactory. Rather than removing the old invoice from the receivables, the accounting department uses a credit memorandum to adjust the balance due on the old invoice, which in turn adjusts the balance due on the customer’s account.

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A credit memorandum may be used to adjust balances due for any type of goods or services. For example, if the client of a teleconference bureau has serious problems with the service delivery on a conference call, and the teleconference provider can determine that the issue was not due to factors at the customer end, there is a good chance that the client will receive a percentage discount on the amount charged for the call, or possibly receive a full credit for the conference. Depending on the practices of the conference call provider, the client may receive an invoice with an attached copy of the credit memorandum, or an invoice with a line item noting the issue of a credit note and the adjusted balance due. If the conference was credited in full, the client may receive no invoice or credit memo at all, as if the conference never took place.

The credit memorandum is an excellent accounting tool that makes it easier to create and maintain a history of what events led to the issue of the credit. Most forms of the memorandum will include vital information such as date, time, client name, the reason for the credit adjustment, and the balance of the account after the adjustment is applied. Depending on the policies and procedures of the seller, additional data may also be included.

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nony
Post 5

@AlexioP - I develop database applications on the side. One of the applications I built was for a customer who needed a customer billing system, with the usual reports.

In addition, however, she stated that sometimes she applies special credits to customer accounts, such as with special discounts, promotions, prorated statements, etc., and she wanted separate reports developed to keep track of these credits.

The database not only had to credit these amounts but also classify the credits as well. It took some time to develop the system but in the end the customer was very pleased.

Having these reports enabled her to keep better track of her credit accounting, and also gently remind her own customers about the breaks she had given them throughout the year.

MrMoody
Post 4

The flip side of a credit memo is a debit memo. This has several applications, but one of them is when a customer is undercharged-yes, I said undercharged-for a product or service, and the vendor submits a debit memo to the customer to that effect.

This does happen from time to time.

I know. I work for a software company that received a notice from one of our customers that we had not properly billed them. They basically pointed out that there was a module that they had purchased and received for which they had never been billed.

It was quite a remarkable admission, considering the fact that the software we sell isn’t exactly cheap. We’re talking thousands of dollars worth of under billing.

Nonetheless, we submitted a debit memo to the customer, thanked them for their honesty and received payment for the balance.

AlexioP
Post 3

@FalcoFan - Credit posting is when a bank posts or records a credit to your bank account. A credit memorandum is a document or form that a company uses to keep track of credits. It's important that companies know when and why credits where issued, not only for accounting purposes but also to keep data that can be analyzed to find patterns that can indicate problems with their products, services or specific customers.

FalcoFan
Post 2

Is credit posting the same thing as a credit memo? If not, what is the difference between the two?

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