In short
- A credit memo reduces what a customer owes on an earlier invoice.
- Common reasons: returns, overcharges, agreed discounts, or settled disputes.
- It lowers the customer’s open accounts receivable balance.
- Applied correctly, it keeps your aging report accurate.
Credit memo, defined
A credit memo, or credit memorandum, is the formal way a seller says ‘you owe less than the original invoice.’ It documents the reduction and the reason for it.
It’s the opposite of a debit memo, which increases what a customer owes.
When credit memos are used
Sellers issue credit memos for returned goods, billing errors and overcharges, post-invoice discounts or rebates, and to settle a deduction or dispute the customer was right about.
Each credit memo is matched against the relevant invoice so the customer’s balance reflects the true amount due.
Credit memos and your ledger
Credit memos directly affect AR: an unapplied credit memo overstates what a customer owes, while a correctly applied one keeps the ledger and DSO honest. Fast, accurate cash application includes applying credits, not just payments.
Frequently asked questions
Is a credit memo the same as a refund?
No. A credit memo reduces an outstanding balance the customer still owes. A refund returns money the customer has already paid. A credit memo can later lead to a refund if there is no open balance to offset.
See Welldun work on your ledger
Welldun chases overdue invoices across email, WhatsApp, and voice, and applies incoming cash to the right invoices automatically — so your DSO falls without the manual chase.
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Deduction management · Accounts receivable · Cash application · Bad debt · Browse the full glossary →