Writing a Credit Memo

A credit memo or credit note is a document that is used to alter or correct errors and mistakes that were made in a sales invoice that has already been processed and sent to the customer. Thus, if a sale is made and the invoice is sent, if there is a need to alter the details, a credit note or credit memo would be issued. This credit note can also be called a negative invoice.

• Over billed: When a product is over charged or over billed, a credit memo can be issued to the customer for the amount that has been over billed.
• Shipping: If the number of units of goods shipped is less than what is entered in the invoice, a credit memo can be issued to credit the customer for the shortfall in quantity.
• Defective Goods: If there are defective, faulty, or rejected goods by the customer, a credit note can be issued for the goods returned to correct the Inventory and Accounts Receivable.
• Wrong Product Shipped: If the product shipped is wrong, to rectify the error, a credit memo can be issued to restore the Inventory and Accounts Receivable.
• Discount after Issuing Invoice: Many times customer ask for a discount after the invoice is made. If this discount is allowed, a credit memo can be issued to adjust the discount amount.
• Write-off Customer Short Payments: Many times customers do not send the full amount of the invoice and you may feel you do not want to recover the shortfall amount. In such cases, a credit note can be issued to write off the shortfall amount.

A credit memo is the opposite of a sales invoice and can have three main parts: the header, body, and footer.

Credit Memo Header

• Letterhead: The letterhead contains the business name, its address, telephone, fax, email, web address, and other details. Many countries have a rule that businesses must include registration and goods and service tax number.
• The word credit note header must be clearly written on the top of the page along with the tax registration number. In fact, in most cases the registration number is written just below the words credit note.
• The credit memo header must also have a credit note number. This number must be a running serial number that must be maintained.
• The credit memo header should also have the credit note date.
• The credit memo header must also contain payment terms.
• The credit memo header must have the customer reference number along with the reference number of the business. The business reference number could be the sales invoice number for which the credit memo is issued.
• The credit memo header must also contain the customer’s name and address.

Credit Memo Body

• The credit memo body must contain a description of why the credit note is being issued. This would include the invoice number, relevant information like pricing error, discount, quantity, etc. In addition to this, it would also show the correct pricing and quantity. Lastly, the net amount would be shown as credit to the customer to adjust the original invoice amount.

Credit Memo Footer

• The credit memo footer would contain the total amount of all the individual items.
• The credit memo footer would also include tax amounts and totals after adding taxes.
• The credit memo footer would also contain any comments or details if required.

Today many tools have been invented for creating a credit note easily and conveniently. Any word processor or spreadsheet can be used to do so. However, this type of software does not allow automatic adjustment in inventory, receivables, etc.

These limitations are overcome by using invoicing or billing software that have a credit memo feature. Some of these software applications are InstantInvoice3 and Ezy Invoice 3000. Both these products also allow an easy tracking feature.

It is also a good idea to get the credit memo checked by a colleague as many times, spelling mistakes are made. Unfortunately, the software applications do not usually come with a spell check feature.

Lastly, make sure the phrase Credit Memo is prominent on the page, as credit memos look similar to invoices. This can become confusing for the customer. Thus, it is a good idea to have the words written in bold on the top of the page.