By The AR Agent team · · 7 min read
A credit memo is a document a supplier issues to reduce the amount a customer owes. It is used when an invoice was too high, goods came back, or a price was agreed after the fact, and it either lowers an open invoice or leaves a credit on the customer's account.
The short name is "credit memorandum". In the UK and many other countries the same document is called a credit note. Either way, the original invoice stays on the books and the credit memo sits alongside it.
An invoice says "you owe us this". A credit memo says "you owe us this much less".
Say a supplier invoices a customer $6,000 for 40 units at $150. The customer returns 4 damaged units. Rather than cancelling and reissuing the invoice, the supplier issues a credit memo for $600 that references the original invoice. The customer now owes $5,400.
Anyone looking at the account later can see what was billed, what was credited, and why.
The common reasons:
A credit memo should follow an agreement, not replace one. If the customer has not asked for a credit and you have not agreed one, an unpaid invoice is a collections question, not a credit memo.
| Document | Who issues it | Effect on what the customer owes |
|---|---|---|
| Credit memo | Supplier | Reduces it |
| Credit note | Supplier | Reduces it (the usual UK and international name) |
| Debit memo | Supplier | Increases it, for example to correct an undercharge |
| Refund | Supplier | Sends money back. It does not change the invoice by itself |
These are the same thing. "Credit memo" is the more common term in the US. "Credit note" is the usual term in the UK. Accounting software uses one name or the other, but the document does the same job.
In the UK, a credit note that adjusts VAT has to meet HMRC's rules. HMRC's VAT guide says it must show, among other things, an identifying number and date, the supplier's and customer's details, a description of what is being credited, the total credited excluding VAT, the VAT rate and amount, and the number and date of the original VAT invoice. If you invoice UK customers with VAT, check that guidance before issuing one.
A debit memo is the opposite. It increases what the customer owes, usually to correct an invoice that was too low, or to add a charge that was agreed but left off. Some businesses simply issue a new invoice instead.
A credit memo changes the balance. A refund moves money. If the customer has not paid yet, a credit memo is usually all you need: they pay the reduced amount. If they have already paid in full, you issue the credit memo first and then either refund the credit or leave it on the account to use against a future invoice.
A clear credit memo includes:
The original invoice reference matters most. Without it, the credit can sit unused for months.
A credit memo reduces your accounts receivable balance, because the customer now owes you less. On the income side, it reduces your sales. The IRS's small business guide, for example, says credits allowed to customers for returned goods and other allowances on sales are deducted from gross sales when working out net sales.
What happens to the customer's open invoices depends on how the credit is applied:
Unapplied credits cause avoidable chasing. Before following up any overdue balance, check for open credits on that account. A statement of account that shows invoices and credits together helps both sides agree the true balance.
No. A credit memo reduces the amount the customer owes. A refund pays money back. If the customer has not yet paid, the credit memo alone settles the difference. If they have already paid, you either refund the credited amount or keep it on their account against a future invoice, as agreed with them.
Usually not, once the invoice has been sent. Editing an invoice the customer already has creates two versions of the same document and confuses their records. A credit memo leaves the original intact and shows exactly what changed and why. Editing may be fine for a draft that has not gone out.
Yes, in most cases. It reverses part of a sale, so it reduces your sales for the period and reduces accounts receivable by the same amount. How you record it depends on your accounting method and setup, so check with your accountant if you are unsure.
There is no practical difference. Both reduce what a customer owes against an earlier invoice. "Credit memo" is the common US term. "Credit note" is the usual UK and international term. In the UK, a credit note that adjusts VAT must meet HMRC's content rules.
Customers sometimes short pay an invoice by the amount of a credit they expect. If you have agreed the credit, issue the credit memo so both records match. If you have not, ask what the deduction is for. A remittance advice usually explains it, and the gap may be a dispute to resolve.
The AR Agent follows up overdue invoices by email using the balances in QuickBooks or Xero, so it works from what is actually still owed. When a customer replies that they are waiting for a credit, or queries part of an invoice, it identifies that as a blocker and pauses normal chasing so the right person on your team can decide. It does not issue credits itself. Deciding whether a credit is fair is a judgement, so it asks your team. Every reply, blocker and action is kept against the customer and the invoice.
Talk to us: our AI agent chases your invoices until you are paid.
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