Everything You Should Know About Types of Credit Memo

You own a credit note and you went to use it but found that it is invalid and got rejected; how frustrating that would be, right? It is not just a hypothetical example, even companies as large as American Airlines sometimes have a hard time.

🗣️”Once travel to the US reopened, we made plans to revive our trip in May 2022 – but AA would not accept our credit note… can you help?”

Read Gill Charlton’s advice here 👇 https://t.co/wNpAZY33G9

— The Telegraph (@Telegraph) April 6, 2022

Thus, in this blog, we will discuss the types of credit memos and credit memo features. But, first, let’s understand what is credit memo is in detail.

What is a Credit Memo?

The credit memo is an abbreviation of a credit memorandum. It is a form of a document issued by the seller of goods or services to the buyer to show a positive balance in the customer’s account.

Types of Credit Memos

There are multiple credit memos issued for diverse circumstances, let’s see what are the types of credit memos.

1. Price Dispute Credit Memo

   One of the most used and common reasons for issuing credit memos is price disputes. Several times, prices are changed after the transaction is done; for such a situation, the seller issues a credit note to the buyer.

   For instance,
   the buyer company has purchased a good of $8000 from the seller company, before delivering of good the price of the good got reduced and now its price is $6000. Now the deal is done, the seller company will issue a credit memo of $2000 as a price dispute.

2. Refund Credit Memo

   Not all days in business are successful and happy, right?

   Some days you have to deal with defective or damaged products and thus, you have to refund your customers. Now, once the transaction is sealed you cannot return it completely, so in this situation, a credit memo is issued.

   The reason for a refund could be also different like the wrong supplies or inappropriate goods.

3. Marketing Allowance Credit Memo

   As a business owner, you may or may not be aware of the 4Ps (Price, Promotion, Place, and People) of marketing. But do you know there is a link between a marketing allowance and a credit memo? Yes, a credit memo can be issued by providing a marketing allowance to the buyer/ customer.

   In marketing allowance, you get a certain amount of discount and offer.

4. Internal Credit Memo

   Internal credit memo is an alien term to many because not all business owners are aware of it. So, what is an internal credit memo? It is a form of document that is created to write off an outstanding receivable balance.

   The sole purpose of an internal credit memo is to keep track of inventory and that’s the reason the copy remains with the seller and is not sent to the buyer.

5. Bank Credit Memo

   A bank credit memo is a little different from other credit memos as it is issued by a bank only. A bank credit memo is a document sent by the bank after a customer.

6. Overstated Credit

   An overstated credit memo is an accounting document issued when the price written in the invoice is incorrect or the reported amount is more than or less than the actual amount.

   Let’s simplify the concept with an easy example of how credit notes work, shall we?

Example of a Credit Memo

To understand it better, let’s understand with credit memo assume. Company A is a seller and company B is a buyer. B has decided to purchase 50 units of goods for $5000. A few days later, B received the goods but founds out that some of them are defective.

Some of them are wrong in size and some of them are damaged. Now, following companies policies A cannot take goods back completely so A, being the seller issues the credit note with reduced payments of the actual money.

The positive balance is the amount seller owes to the buyers. Moreover, the seller should review the open credit memos at the end of each reporting period. It will help them to see if the customer owes money that can be linked to open accounts receivable.

The accounting software decreases the aggregate dollar amount of invoices outstanding and helps to manage future payments more efficiently.

For a quicker process, try the word doc of credit memo template.

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Conclusion

Most credit memos have different reasons for issuing but it always helps buyers and sellers to maintain their existing balance account. And knowing the types of credit memorandum will help to differentiate documents. But does a credit memorandum makes you frustrated?

If creating and managing credit memorandums worries you, just use a credit memo software and relax!