Key takeaways
- A credit memo is the US term for a credit note. A seller issues one to cut a customer balance. A buyer records a vendor credit memo when a supplier credits it.
- It is applied against an open invoice, held as a credit balance or refunded.
- The entry reverses revenue or expense and any sales tax on the original sale.
- Always reference the original invoice and keep the reason code the same across the team.
Free PDF and Excel: Credit memo template and journal entry guide. Get it below
What a credit memo is
A credit memo is a document and an accounting transaction that reduces the amount a customer owes, usually because of returns, pricing corrections or allowances.
If you work with international suppliers you will see the same document called a credit note. Credit memo is the common name in the United States and in most accounting software. For the debit side see debit memo, and for the difference between the pair see credit memo versus debit memo.
A distributor invoices a retailer 5,000 plus 400 sales tax. The retailer returns goods worth 1,000. The distributor issues credit memo CM-0178 for 1,000 plus 80 sales tax, a total of 1,080.
The retailer applies the memo against the open invoice. The balance due is 4,320. In the distributor's books, revenue falls by 1,000 and the sales tax liability falls by 80.
The accounting entries
| Side | Debit | Credit |
|---|---|---|
| Seller, goods returned | Sales returns and allowances, Sales tax payable | Accounts receivable |
| Buyer, vendor credit received | Accounts payable | Purchases returns, or the original expense account |
Free PDF and Excel
Credit memo template and journal entry guide
A credit memo layout, reason codes and a simple journal entry guide for sellers and buyers.
- Credit memo layout
- Reason codes
- Journal entry guide
- Excel credit memo register
Fields
| Field | What goes in it | Why it matters |
|---|---|---|
| Memo number and date | Sequential number and date. | Audit sequence. |
| Customer or vendor | Name and account number. | Posts to the right ledger. |
| Original invoice | Number and date. | The link to the sale. |
| Reason code | Return, price adjustment, damage, discount, error. | Lets you analyse returns later. |
| Lines | Items, quantities, prices. | Reverses the sale line by line. |
| Sales tax | Tax reversed, by jurisdiction. | Keeps the sales tax return right. |
| Application | Applied to invoice, held as credit, or refunded. | Settlement path. |
Mistakes
- Crediting the invoice total when only a few lines are returned.
- Forgetting to reverse sales tax.
- No reason code, so returns trends are invisible.
- Leaving credits unapplied for months.
- Giving a credit when the contract says refund only.
- Original invoice is referenced.
- Reason code is chosen.
- Tax is reversed in the right jurisdiction.
- Customer or vendor is told how it will be applied.
- An approver signed off if above the limit.
Last checked: 19 October 2026. General US accounting practice. Sales tax rules differ by state. Ask your tax adviser.
Frequently asked questions
What is the difference between a credit memo and a credit note?
Nothing in function. Credit memo is the US name, and credit note is used in the UK, India and much of the rest of the world.
When do I issue a credit memo?
For returns, pricing errors, damaged goods, allowances and billing mistakes.
Is a credit memo a refund?
No. It reduces what is owed. A refund returns cash. You can issue a memo and then refund the credit balance.
Does a credit memo affect sales tax?
Yes. It reverses the sales tax charged on the original sale for the credited amount.
Who approves credit memos?
Usually a sales or finance manager, with limits by amount.