what is a credit memo

A credit memo, or credit memorandum, is a commercial document issued by a seller to a buyer, reducing the amount that the buyer owes to the seller under the terms of an earlier invoice. It is evidence of a reduction in the amount a buyer owes a seller under an earlier invoice. A credit memo may be issued because the buyer returned goods to the seller, or there is a pricing dispute, or a marketing allowance, or other reasons under which the buyer will not pay the seller the full amount of the invoice. The seller records the credit memo as a reduction of its accounts receivable balance, while the buyer records it as a reduction in its accounts payable balance. A credit memo lists the products, quantities, and agreed prices for products or services the seller provided the buyer but the buyer returned or did not receive. It may be issued in the case of damaged goods, errors, or allowances. In respect of the previously issued invoice, a Credit Memo will reduce or eliminate the amount the buyer has to pay.