What is a credit memo?

A credit memo is a transaction that decreases the amount a customer owes to a business. It is typically issued when a customer returns goods, when there is an overbilling, or when an adjustment is necessary due to a pricing dispute or error. By creating a credit memo, the company acknowledges that the customer has a reduced obligation to pay, effectively updating the customer's account balance to reflect this change.

This helps maintain accurate financial records and improves customer relations by ensuring that customers are not overcharged or left with an incorrect balance on their accounts. The functionality of credit memos is essential in accounts receivable management, as it facilitates proper adjustments to accounts while ensuring that both customers and the business maintain accurate financial data.