What Is a Credit Memo?

Meow Technologies, Inc.

Meow Technologies, Inc.

Credit memos, though a simple accounting concept, are a critical tool for businesses to understand. These documents allow companies to properly account for returns, disputes, and changes in transactions with customers. Getting credit memos right keeps financial reporting accurate and cash flow smooth. However, many small business owners have limited familiarity with what credit memos are, why they are used, and best practices in leveraging them. This article will provide an in-depth explainer on credit memos - from formal definitions to real-world examples and tips on managing them effectively.

What is a Credit Memo? A Formal Definition

A credit memo, short for “credit memorandum,” is a document issued by a seller/vendor to a business customer to reduce the amount owed from a previous transaction. This credit is applied towards the existing balance on the customer's account, lowering the total rather than refunding cash. Reasons for a reduced charge can include:

  • Returned goods due to defects, damage, incorrect specifications etc.
  • Disputes over pricing, shipping costs, other charges
  • Changes in item prices post-purchase
  • Goodwill discounts offered after the sale

Key Differences Between Credit Memos and Refunds

While they accomplish similar goals of adjusting a customer's owed balance, credit memos differ from cash refunds in an important way. A refund gives actual money back to the buyer after a return or dispute. The funds come out of the seller’s bank account to reimburse the exact purchase amount to the customer.

In contrast, a credit memo leaves the cash transaction as is. The customer keeps the merchandise (in the case of an accepted return) and the seller keeps the original funds while deducting the amount from future purchases. Essentially, a credit note acts as credit towards buying additional products instead of cancelling the sale outright.

Top Reasons Credit Memos Get Issued

Understanding why credit memos originate can help businesses set policies and manage them smoothly. The most common scenarios include:

  • Returns - Buyers receive defective, damaged or wrongly shipped items and return them per vendor policies. Issuing a credit note avoids lost revenue while maintaining the customer relationship.
  • Pricing Issues - Discrepancies in quoted prices, unaccounted taxes/fees or eligibility for discounts prompt vendors to credit over-charges. This preserves order accuracy.
  • Post-Sale Price Changes - Buyers receive credits if an item they recently purchased gets marked down in the days or weeks afterwards. This is more typical in industries like fashion with frequent promotions.
  • Marketing Allowances - Vendors issue memos proactively as incentives for future purchases, volume discounts or to offset shipping costs during slower seasons. This encourages greater customer loyalty and retention.
  • Admin Errors - Whether due to inaccurate product specs, misquotes or wrong terms listed, vendors rectify their own mistakes via credit memos to maintain credibility and reduce disputes.

How Do Credit Memos Work? Key Processes Explained

Now that we’ve covered the definition and common reasons behind credit memos, how does issuing and redeeming them actually play out? Here are the standard procedures:

  • Seller Records
    • The vendor or retailer logs the credit memo to reduce the accounts receivable balance for that client in their bookkeeping/accounting system. Less money gets marked as “owed” by that buyer going forward.
  • Buyer Applies Credit
    • If the customer has already paid their invoice fully before receiving the credit memo, they have two options to redeem it:
      • Apply the credit amount towards their next purchase(s) with this seller up to the value of the note.
      • Request a cash refund check from the vendor for the amount they were credited.
    • If the buyer has not yet paid for the original goods at the time of receiving a credit memo, it simply reduces how much they still need to pay the vendor. Only a portion of the total initial invoice needs fulfilling.
  • Approval Workflows
    • Depending on the size of credit memos, sellers often require management approval before issuing them. High value credits eat into revenue so protocols limit and track these instances. Many accounting systems have built-in workflows to route larger memos to appropriate decision makers.
  • In terms of recording the credit memo, buyers mark it under accounts payable as a deduction or reduction in their outstanding vendor payments. The approved credit gets applied to the next bill until fully utilized.

Best Practices For Managing Credit Memos

With credit memos touching so many critical accounting functions like receivables, payables, inventory and customer service, having efficient processes is vital for smooth operations and accurate reporting.

Here are key best practices companies should follow:

Link Memos to Open Receivables

Tie credit records directly to related customer invoices and transactions in the accounting system whenever feasible. This connects the dots across documents that amend each other for a complete paper trail.

Log Reasons and Set Reporting

Categorizing each memo by its exact reason (return, dispute etc.) lets companies surface patterns in what prompts them. The analytics can lead to insights on improving product quality, pricing integrity, order accuracy and so on proactively.

Regularly Review Open Credits

Payables and receivables can blur if credit balances languish on account without being used or refunded. Review open credits every month or quarter to true up accounts. This avoids overstating unpaid vendor invoices or what the business owes.

The faster credits get applied or returned as cash, the better it is for cash flow on both ends. Letting these accumulate distorts financial positions.

Key Takeaways On Credit Memos

Credit memos are an indispensable tool for accurate accounting between buyers and sellers of products or services. Issued after an invoice, these documents allow vendors to reduce what the customer owes either against future purchases or as a cash refund.

Understanding the scenarios like returns, disputes and policy exceptions that trigger memos allows companies to control them better via approvals. Electronically linking them to related transactions keeps record-keeping transparent. Meanwhile reviewing open customer credits periodically ensures payments get reconciled fully.

Having the right credit memo capabilities across systems prevents revenue leakage or needless write-offs. As with every financial process, optimizing protocols saves significant time and complications down the line.


Meow Technologies is a financial technology company, not a bank or FDIC-depository insured institution. Likewise, Meow Technologies is not an investment adviser and none of the information presented herein should be relied upon as financial advice or a recommendation to make any financial decision nor should it be considered to be tax or legal advice. The information is the opinion of Meow Technologies for educational purposes and may not be suitable for all companies. Products, like the one described herein, are offered through Meow Technologies and are not advisory services which are only offered through Meow Advisory, LLC.** The FDICs deposit insurance coverage only protects against the failure of an FDIC-insured bank.**

Get started with Meow in under 10 minutes

*Disclaimer: Meow Advisory LLC is a registered investment adviser. Registration as an investment adviser does not imply any level of skill or training.
For accounts opened through Atomic Brokerage LLC: Meow Advisory LLC has an engagement with Atomic Brokerage LLC (“Atomic Brokerage”), a registered broker-dealer and member of FINRA and SIPC , to bring you the opportunity to open a brokerage account. Brokerage services for customers of Meow Advisory LLC are provided by Atomic Brokerage. For more details about Atomic Brokerage, please see the Form CRS, General Disclosures, and the Privacy Policy. Check the background of Atomic Brokerage on FINRA’s BrokerCheck.
For subadvisory services for accounts opened through Atomic Invest LLC: Meow Advisory LLC has an engagement with Atomic Invest, LLC (“Atomic Invest”), an SEC-registered investment adviser, to bring you the opportunity to open an investment advisory account. Investment advisory services are provided by Atomic Invest. Companies which are engaged by Atomic Invest receive compensation of 0% to 0.85% annualized, payable monthly, based upon assets under management for each referred client who establishes an account with Atomic Invest (i.e., exact payment will differ). Atomic Invest also shares a percentage of compensation received from margin interest and free cash interest earned by customers with Meow Advisory LLC. Meow Advisory LLC is not a client of Atomic Invest, but our engagement with Atomic invest gives us an incentive to refer you to Atomic Invest instead of another investment adviser. This conflict of interest affects our ability to provide you with unbiased, objective information about the services of Atomic Invest. This could mean that the services of another investment adviser with whom we are not engaged could be more appropriate for you than Atomic invest. Advisory services through Atomic Invest are designed to assist clients in achieving a favorable outcome in their investment portfolio. They are not intended to provide tax advice or financial planning with respect to every aspect of a client’s financial situation and do not include investments that clients may hold outside of Atomic Invest. For more details about Atomic Invest, please see the Form CRS, Form ADV Part 2A, the Privacy Policy, and other disclosures. Brokerage services for Atomic Invest are provided by Pershing Advisor Solutions LLC (“PAS”), a registered broker-dealer and member of FINRA and SIPC.
Neither Atomic Invest nor Atomic Brokerage, nor any of their affiliates, is a bank. Investments in securities are Not FDIC insured, Not Bank Guaranteed, and May Lose Value. Investing involves risk, including the possible loss of principal. Before investing, consider your investment objectives and the fees and expenses charged by Atomic Brokerage and/or Atomic Invest.
See the Legal Section within the Meow website for additional agreements.

U.K. Gilt pricing quoted net of fees. ~5% U.K. Gilt yield is sourced from Investing.com December 2023 6-month United Kingdom 6-Month Bond Yield. ~5% Treasury Bill yield is sourced from treasurydirect.gov December 2023 12-week U.S. Treasury Bill auction.

**Disclaimer: Meow Technologies is a financial technology company, not a depository, bank or credit union, and your account at Meow is not, itself, an FDIC-insured product.

Meow currently partners with three banking providers. Banking services are provided by Third Coast Bank SSB; Member FDIC, Grasshopper Bank, N.A; Member FDIC, and FirstBank, a Tennessee corporation; Member FDIC.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by Grasshopper Bank, N.A, you deposit your funds into a deposit account at Grasshopper Bank, N.A. which sweeps those funds into deposit accounts across a network of Federal Deposit Insurance Corporation (“FDIC”)-insured banks, for up to the current standard maximum deposit insurance amount (“SMDIA”) of $250,000 per eligible depositor, per destination institution, for each ownership capacity or category, subject to applicable terms and conditions, including Grasshopper's ICS Deposit Placement Agreement. Grasshopper Bank, N.A. uses a third-party vendor and agent to help administer this sweep process. Visit https://www.intrafi.com/network-banks/ for a list of the banks and savings associations with which we/Grasshopper, N.A. have a business relationship for the placement of deposits at destination institutions, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by Grasshopper, N.A. or you). The current maximum deposit insurance amount for your funds is up to $125 million in FDIC insurance through the sweep network of Grasshopper Bank, N.A, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and restrictions and refer to the applicable rate sheets for additional information.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by Third Coast Bank SSB, you deposit your funds into a deposit account at Third Coast Bank SSB. If you also hold funds in a sweep program with Third Coast Bank SSB, Third Coast Bank SSB sweeps those funds into deposit accounts across a network of FDIC-insured banks, for up to the current SMDIA of $250,000 per eligible depositor, per receiving bank, for each ownership capacity or category, including any other balances you may hold at that receiving bank directly or indirectly through other intermediaries, including broker-dealers. Third Coast Bank SSB uses a third-party vendor and agent to help administer this sweep process. Visit Third Coast Bank SSB for a list of the banks and savings associations with which we/Third Coast Bank SSB have a business relationship for the placement of deposits at receiving banks, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by Third Coast Bank or you). The current maximum deposit insurance amount for your funds is up to $50 Million in FDIC insurance through the sweep network of Third Coast Bank, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and conditions and refer to the applicable rate sheet for additional information.

By opening a Maximum Checking account through Meow and if you choose to receive banking services provided by FirstBank, a Tennessee corporation, you deposit your funds into a deposit account at FirstBank, which sweeps those funds into deposit accounts across a network of FDIC-insured banks, for up to the current SMDIA of $250,000 per eligible depositor, per destination institution, for each ownership capacity or category, subject to applicable terms and conditions, including FirstBank's ICS Deposit Placement Agreement. FirstBank uses a third-party vendor and agent to help administer this sweep process. Visit IntraFi for a list of the banks and savings associations with which FirstBank has a business relationship for the placement of deposits at destination institutions, and into which your deposits may be placed (subject to applicable terms with you, and any opt-outs by FirstBank or you). The current maximum deposit insurance amount for your funds is up to $125 million in FDIC insurance through the sweep network of FirstBank, subject to change at any time with notice from Meow and/or pursuant to applicable law. Terms and restrictions apply. Subject to applicable rate sheet. Interest rate on checking products quoted in Annual Percentage Yield (APY). Interest rates and yields are effective as per the date on the applicable rate sheet. See applicable terms and restrictions and refer to the applicable rate sheet for additional information.

***FDIC insurance coverage is only available to protect you against the failure of an FDIC-insured bank that holds your deposits (and does not protect you against the failure of Meow or other third party). Your account with Meow and all services provided to you are subject to the Meow Terms of Service (“Account Agreements”) and other applicable terms and no other representations or warranties, express or implied, are provided to you except as expressly set forth in those written Account Agreements. If you have any questions regarding your account, please contact team@meow.com.

FirstBank Funds Availability Notice

FirstBanks general policy is to allow you to withdraw funds deposited in your account on the first business day after the day we receive your deposit. Funds from electronic deposits will be available on the day we receive the deposit. In some cases, we may delay your ability to withdraw funds beyond the first business day. Then, the funds will generally be available by the SECOND business day after the day of deposit.