One kind of credit memo is issued by a seller to decrease the amount owed by a customer from a sales invoice that was issued in the past. For example, seller A had issued a sales invoice for $800 for 100 units of merchandise to Buyer B at a price of $8 each. The buyer informs the seller that one of the units is faulty and a credit memo of $8 is issued by the seller. Following effects are produced in the sellers’ accounting books:
- A debit of $8 takes place to sales returns and allowances
- A credit of $8 to the accounts receivable takes place
So to speak, the credit memo led to a reduction in the net sales of the seller and its accounts receivable. When the buyer books the credit memo, the following impact takes place on its accounting records:
- A debit of $8 to its accounts payable
- A credit of $8 to Purchases Returns and Allowances along with the inventory
There is another kind of credit memo which is also known as Credit Memorandum. It is issued by a bank when it increases the balance in a depositor’s checking account for a particular transaction.