How does a credit memo affect the customer's balance?

A credit memo reduces the amount owed by a customer, effectively lowering their account balance. When a business issues a credit memo, it indicates that a certain amount is being credited back to the customer, which can arise from return items, discounts, or other adjustments necessary due to prior sales transactions. This reduction reflects that the customer has a lesser obligation to pay, either because they returned goods or were granted some form of credit that offsets their earlier purchases.

By decreasing the customer's outstanding balance, a credit memo serves to correct or adjust the financial records accurately. Thus, it supports the overall integrity of the accounts receivable process, ensuring that the amount customers are expected to pay aligns with current transactions and agreements.