What Is a Credit Memo?

A credit memo corrects a sale after it has been invoiced. When an order is billed on terms, the invoice amount is already in the seller's accounts receivable. Rather than reissuing the invoice or sending money back, the seller issues a credit memo for the difference.

• The seller issues it. It is the seller's record that the buyer owes less.
• It points to the original sale. It names the invoice it adjusts, so both sides can match it.
• It changes the balance. The buyer's open balance drops by the credit amount. If the invoice was already paid, the credit stays on the account for a later invoice or is refunded.

For tax purposes, the IRS counts credit refunds to customers, along with cash refunds, rebates and other allowances off the actual sales price, as returns and allowances. Gross receipts minus returns and allowances gives net receipts.

Reasons vary by seller and by policy. They include:

• Returned goods: the buyer sends back part of an order.
• Damaged or short shipments: fewer or damaged units arrived.
• Pricing errors: the invoice used the wrong price for the buyer's account.
• Allowances and rebates: an agreed allowance off the sales price.

• Credit memo: lowers what the buyer owes. No money moves unless the credit is later refunded.
• Refund: sends money back to the buyer, to the original payment method or another one.
• Debit memo: the opposite adjustment, which raises what the buyer owes, for example for an undercharge.

Trading partners that exchange documents by EDI can send adjustments as the X12 812 Credit/Debit Adjustment transaction set. X12 says it can be used to notify a trading partner of an adjustment or billback, or to request one, and that it carries the details and amounts covering exceptions, adjustments, credits or debits for goods or services. It is multidirectional between trading partners. The X12 invoice itself is the EDI 810.

A janitorial supply distributor invoices a facilities company $6,000 for 200 cases of hand towels at $30 a case, on net 30 terms. Twenty cases arrive water-damaged and the buyer returns them.

The distributor issues a credit memo for 20 x $30 = $600 that references the original invoice. The buyer's open balance on that invoice becomes $6,000 minus $600 = $5,400, which is what it pays by the due date.

On Shopify B2B, store credit can carry a credit to a business account:

• Company location credit: you issue store credit to a company location from the Shopify admin, and every authorized B2B customer of that location can apply it at checkout. Shopify names refunding a purchase as one reason to issue it.
• Refund to store credit: when you refund an entire order or part of an order, you can choose store credit as the refund method, even for orders paid by credit card.
• Paying invoices: store credit can be used to pay an invoice when payment is due under the payment terms. It can't be used toward a deposit, and only the full store credit amount can be applied.
• Limits: you can issue less than $10,000 USD of store credit to a company location, and you can't move a balance to another location.
• Reporting: the Store credit transactions report can be filtered by B2B dimensions such as company and company location.

Uncap Portal gives trade accounts a self-serve home on Shopify, with catalogs, pricing, reorders, invoices, and users. It puts NET terms, invoices, and payments in the portal, so buyers reorder, track, and pay from a portal built for their account.

• Accounts receivable
• EDI 810
• Purchase order
• Order-to-cash
• Days sales outstanding
• Net 30

• X12: Transaction Sets (812 Credit/Debit Adjustment)
• IRS Publication 334: Tax Guide for Small Business (Figuring Gross Profit)
• Shopify Help Center: Setting up store credit for B2B