Companies sell products and services to customers. In most cases, the customer receives those items and accept them. Then, the company sends an invoice which is a payment request. Once the customer processes the invoice, it will repay the supplier. This process works similarly for when companies acquire products or services from suppliers.
In some cases, companies may also offer a sales return policy. Therefore, they allow customers to return goods that do not meet their requirements. However, it also complicates the accounting process for those returns. In the above process, the return process may occur at any time after the company delivers its products. Since services are perishable, sales returns don’t apply to those contracts.
Once customers receive goods, they may choose to return them. However, the supplier may also send an invoice in the meanwhile. In some cases, customers may also accept the goods delivered to them. However, the invoice may quote a higher amount or include more units. Therefore, they will expect the company to reduce the price on the invoice. For that, companies will require a source document.
What is a Credit Memo?
A credit memo, also known as a credit memorandum, is a source document. This document allows companies to use evidence for a sales return journal entry. Essentially, this document gets issued by the company to the customer. Through it, companies can reduce the customer’s obligation in the general ledger accounts.
The credit memo acts as a document to allow customers to realize the price reduction. It is similar to the invoice, which requests the customer pay for the products or services. However, it has the opposite impact from that of an invoice. Instead of increasing the price that customers must pay, the credit memo decreases it. For the supplier, it acts as a source document to record the reduction in the accounting system.
Another more common name used for the credit memo is the credit note. It is evidence of a reduction in the amount that a buyer owes a seller. The source of the credit memo is the company that issues it. In that context, this document is the opposite of the debit memo. The debit memo is a source document issued by a customer requesting a price reduction.
The credit memo may reduce an invoice or a partial amount. However, companies must have already sent out the invoice to issue a credit note. In some cases, companies may also use this document to reduce several invoices simultaneously. There are several reasons why companies issue credit memos.
Overall, a credit memo is a document sent to a customer by a supplier. This document includes a reduction in the amount owed by the customer. Usually, it reverses the full or partial amount of an invoice issued earlier by the supplier. In accounting, the credit memo is a crucial source document to support the reduction in accounts receivable.
Why do companies issue a Credit Memo?
As mentioned, there are several reasons why companies issue a credit memo. In essence, when a supplier sends an invoice, the credit memo reduces that amount. In most cases, companies use this document to support a sales return. Therefore, when customers return the goods they receive, they will also require the supplier to reduce their owed amount. The credit memo can help in that matter.
Credit memos do not apply to sales returns only. In some cases, customers may also accept the goods. However, they may not agree to the prices charged in it. In some cases, companies may send wrong invoices to the customer. Similarly, they may charge a higher price than agreed to in the contract. Furthermore, companies may also include additional items in the invoice.
The credit memo also applies to those situations. For those invoices, the credit note reduces the partial amount on the invoice. Through this process, companies can keep accounting records accurate. Companies cannot remove or delete invoices from their systems due to accounting practices. Therefore, the credit memo is crucial in cancelling the effects of the issued invoices.
In some cases, customers may also modify their orders after the company issues the invoice. Although companies do not give any reductions in the price in those cases, they may still offer to do so. Usually, through this process, companies can please customers as an act of goodwill. In some cases, the credit note may not apply to the contract between both parties. Despite that, companies may issue these to support customers.
Overall, the credit note covers various scenarios related to issued invoices. It allows companies to reduce invoice amounts for sales returns. Apart from that, it can also apply to invoices where the amounts charged to customers are incorrect. In essence, credit notes are crucial where companies have already distributed an invoice. Since they cannot remove the invoice from the accounting record, they must issue a credit memo instead.
What is a Credit Memo in Banking?
The credit memo in accounting is a critical document to reduce the money owed by customers. In banking, however, it does not represent a document. Similarly, it does not relate to the amount owed by the bank. A credit memo in banking is an item that appears on the bank statement. This item increases the balance on a checking account.
Credit memos are regular appearances on most checking amounts. Like in sales, this item can also apply to various scenarios. Usually, when banks add interest earned by the deposited money, they use a credit memo. Through these, the bank shows the increase of funds into the customer’s bank account. Apart from that, the credit memo in banking also applies to other areas.
The credit memo in banking also applies when banks refund a previous bank charge. In this instance, it is similar to a credit memo in accounting. With these, banks reverse an expense on a customer’s bank account. Similarly, when banks collect a note for the customer, they will use a credit memo to report it on the bank statement.
Overall, credit memos are items that increase the balance in a customer’s checking account. These memos apply to several scenarios where the bank adds funds to a bank account. However, these are not the same as receipts. In most cases, credit memos in banking come from the bank itself. Therefore, the bank is the source for these items.
What is a Credit Memo in Bank Reconciliation?
Credit memos are highly crucial in the bank reconciliation process. This process involves equaling the balance on a company’s general ledger account and bank statements. Since both records have different sources, the closing balances usually do not match. Through bank reconciliation, companies can identify the reasons for the mismatch in those balances.
The credit memo is crucial in bank reconciliation since its source is the bank. Usually, banks add funds through these memos to the customer’s bank account. However, customers do not receive any notifications for these. Once they receive their bank statements, they can identify the credit memos that incremented the bank balance.
Credit memos in the bank reconciliation statement are a part of unrecorded differences. Companies identify these memos and use them to reconcile bank statements and general ledger balances. On top of that, they also record these items in the financial statements. Since they do not receive a notification for these memos, they can only account for them after receiving a bank statement.
Overall, credit memos in bank reconciliation are unrecorded differences. The source for these memos is the bank. Therefore, the company does not have these recorded in the general ledger. Once they receive the bank statement, they can identify any credit memos and account for them. Usually, these add to the balance in the general ledger account.
Conclusion
Credit memos are source documents. They help companies reduce the invoices charged to customers. In banking, credit memos increase the checking account balance. These memos may apply to various scenarios, as mentioned above. Similarly, credit memos are also a crucial part of the bank reconciliation process.
