Credit memo vs. debit memo: The essential guide

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When you run a small business, the odds are you’ve received that phone call from a frustrated customer. They say they were overcharged on their last invoice, and when you look into it, their claim is justified. You need a way to correct the error without creating a new invoice.

This is where a credit memo can help. Or, if you undercharged a customer, you might issue a debit memo. These adjustments are common, and handling them well keeps your records accurate and your customer relationships intact.

A credit memo reduces what a customer owes after an invoice; a debit memo increases it. Used correctly, they protect your margins and cut down on billing errors.

What is a credit memo?

A credit memo, short for credit memorandum, is a document a seller issues to a buyer to reduce the amount the buyer owes after an invoice. Sometimes called a credit note, it typically includes details like the invoice number, the date the credit is issued, descriptions and quantities, the credit amount, and the reason for the credit. A credit memo may also reference related purchase order numbers so it’s easy to connect to the original transaction.

Credit memos are used to correct errors, issue discounts, or handle returns after an invoice has been issued. Instead of canceling the original invoice, the seller sends a credit memo to adjust the balance due.

Common reasons for issuing credit memos

Businesses typically use a credit memo when a customer owes less due to a return, discount, or other adjustment. Common reasons include:

  • Product returns and refunds: When a customer returns goods or finds them faulty after a sale, you issue a credit memo to reduce the amount owed
  • Pricing errors and overcharges: A credit memo corrects mistakes such as accidental overbilling or missed promotions
  • Damaged goods or quality issues: Issue a full or partial credit if products arrive damaged or don’t meet quality standards
  • Early payment discounts: Use a credit memo to document the reduced total when customers qualify for early payment terms
  • Service cancellations: Credit the unused portion when a service is canceled before completion

Customers can apply the credit to a future purchase or request a refund. The credit memo serves as a record for both the buyer and the seller.

How credit memos affect your books

Credit memos reduce the amount a customer owes, which directly impacts your accounts receivable balance. They can also affect revenue recognition because lowering the sale amount may change what appears on your income statement. If sales tax was charged on the original invoice, the credit memo should reflect the tax difference as well. Consult a tax professional to understand implications in your jurisdiction.

faq
Is a credit memo the same as a refund?

A credit memo is not the same as a refund, though they are related. A credit memo reduces the total amount a customer owes, often for future purchases. A refund returns money directly to the customer.

What is a debit memo?

A debit memo, also called a debit note, is a document a seller uses to notify the buyer about an additional charge added to the buyer’s account after an invoice has been issued. In short, a credit memo reduces what’s owed; a debit memo increases it.

A debit memo typically includes the original invoice number, the date of the debit, the debit amount, item descriptions, and the reason for the adjustment. It often references purchase order numbers and payment terms to make reconciliation straightforward.

Common scenarios for debit memos

After an initial invoice, you might issue a debit memo to adjust a customer’s account for additional charges or corrections. Common scenarios include:

  • Underbilling corrections: Use a debit memo to collect the difference when a line item or rate was missed
  • Additional charges after the initial invoice: Add fees for approved extra work or new expenses that arose later
  • Bank fees and service charges: Document penalties or service charges tied to overdue amounts
  • Interest charges on late payments: Apply interest as specified in payment terms for late invoices
  • Price adjustments due to contract changes: Reflect mid-project scope changes that affect pricing

Accounting impact of debit memos

On the seller’s books, a debit memo increases accounts receivable because the customer owes more. On the buyer’s books, it increases accounts payable. It also affects expense recognition on the buyer side when the new costs are recorded.

When you reconcile accounts, track debit memos alongside their original invoices and subsequent payments. Unreconciled debit memos can create budget variances and trigger avoidable disputes.

Credit memo vs. debit memo: Key differences

Here are the main differences between a credit memo and debit memo at a glance:

AspectCredit memoDebit memo
Direction of money flowSeller owes the buyer (reduces the buyer’s balance due)Buyer owes the seller (adds to the buyer’s balance due)
Effect on A/R and A/PSeller A/R decreases; Buyer A/P decreasesSeller A/R increases; Buyer A/P increases
Income recognition (high level)Seller revenue decreases; Buyer expense decreasesSeller revenue increases; Buyer expense increases

Direction of money flow

After an invoice is issued, you’ll use one of these memos to adjust the balance. A credit memo moves money from seller to buyer; a debit memo moves money from buyer to seller.

Let’s look at two examples:

  • A grocery chain orders a $1,000 shipment of canned goods and half arrive damaged. The distributor issues a $500 credit memo to reduce the outstanding balance.
  • A marketing agency buys an annual SaaS plan and later adds features. Instead of issuing a new invoice, the SaaS vendor issues a debit memo to increase the amount owed.

Impact on financial statements

This is how credit and debit memos are recorded on different financial statements:

  • Balance sheet: A credit memo decreases accounts receivable on the seller’s balance sheet and accounts payable on the buyer’s balance sheet. Likewise, a debit memo increases accounts receivable on the seller’s balance sheet and accounts payable on the buyer’s balance sheet.
  • Income statement: A credit memo may reduce revenue on an income statement. A debit memo will increase it.
  • Cash flow statement: Credit memos mean reduced cash flow, as you may need to issue a refund to a customer. Debit memos increase cash flow, as you receive additional payment from a customer.

Let's look at two examples to illustrate:

  • A distributor accidentally overcharges a retail store for shipping for a large purchase. When they issue a credit memo, it reduces accounts receivable on their balance sheet and decreases revenue, resulting in reduced cash flow.
  • A customer doesn’t pay their invoice for several months. Based on the terms of their contract, they are liable for penalties due to the late payment. The seller can issue a debit memo to collect those additional late fees, which increases their accounts receivable on the balance sheet and revenue on the income sheet.

From the buyer’s vs. seller’s perspective

For buyers, a credit memo signals a reduction in what they owe; a debit memo signals an additional charge. For sellers, a credit memo recognizes less due from the buyer, while a debit memo requests more. The similar names create confusion, but they play opposite roles in adjusting an existing invoice.

How to create and process credit memos

Credit memos help you correct billing errors, process returns, and honor discounts without canceling the original invoice. Here’s a straightforward way to create and process them:

  1. Identify the credit: Confirm why you’re issuing the credit—return, overbilling, damaged goods, discount, or pricing error
  2. Reference the original invoice: Match quantities, rates, and tax so the credit ties cleanly to the original transaction
  3. Gather required details: Include customer info, original invoice number, items and quantities, reason for credit, credit amount, and a unique memo number; attach supporting documentation
  4. Route for approval: Follow internal thresholds and approval paths to maintain control and an audit trail
  5. Issue the memo: Send the credit memo to the customer and confirm receipt
  6. Record and reconcile: Record in accounts receivable, apply the credit to the customer’s account, and confirm it clears in reconciliation

Example: Accounting impact

  • Original Invoice = $1,000
  • Credit Memo = $100
  • A/R After Credit = $1,000 – $100 = $900

If sales tax was included on the original invoice, reflect the proportional tax reduction in the credit memo.

Approval workflows

Setting up clear internal workflows will ensure that credit memos are processed and approved accurately and efficiently. Make sure to give credit memos unique identification numbers to avoid duplication. Include all required documentation so it’s easy to understand why it’s being issued.

Typically, credit or debit memo processing can take 7 to 14 business days, depending on the complexities of your workflow. But for larger organizations, the process may take as long as 30 days. To keep things moving, you can set up approval thresholds so that smaller credits can be approved automatically, freeing the finance team to review only the more significant credits. This workflow can be automated using accounting software platforms to help avoid manual data entry, enforce approval rules, and improve visibility between departments.

Credit memo template and examples

When creating a credit memo, these are the essential fields to include:

  • Credit memo number
  • Date issued
  • Customer information, including name, address, contact information
  • Original invoice number
  • Item details, including quantity, price, and description
  • Reason for the credit
  • Total credited amount
  • Approval signatures
  • Payment terms

Sample credit memo template

Customize this template with your company’s information and the specific needs for each credit:

Your company name:
Address:
Phone:
Email:
Date issued (MM/DD/YYYY):
Credit memo #:
Bill to - Customer name:
Bill to - Address:
Bill to - Contact:
Original invoice #:
Original invoice date (MM/DD/YYYY):
Item/service:
Quantity:
Unit price:
Reason for credit:
Total credited amount:
Authorized by (Name, Title):
Payment terms (e.g., Net 30):

Common credit memo mistakes

To stay compliant with accounting best practices, maintain good relationships with your customers, and keep approval workflows efficient, avoid these common mistakes:

  1. Omitting the invoice reference: This can confuse customers and lead to delays in reconciliation
  2. Not documenting the reason: Create detailed rationales for credits for proper documentation for future audits
  3. Inconsistent formats: To make things simple, find a template that works and stick to it to avoid errors and delays in review time
  4. Skipping approval steps: This increases the risk of credit card fraud or sending unauthorized credit memos to customers
  5. Poor communication: Before issuing a credit memo, reach out to your customer so they understand the rationale and can update their own records

How to create and process debit memos

Debit memos document additional charges after an invoice has been issued. Use them to correct underbilling, add approved work, or apply penalties specified in your terms.

Step-by-step process

  1. Identify the debit: Confirm why you’re issuing the debit—additional charges, underbilling, or late payment penalties
  2. Reference the original invoice: Match the new charges to the original terms, quantities, and rates
  3. Gather required details: Include customer info, original invoice number, description of new charges, debit amount, and a unique memo number; attach supporting documentation
  4. Route for approval: Follow thresholds and approval paths to maintain controls and an audit trail
  5. Issue the memo: Send the debit memo to the customer with a brief explanation and contact info
  6. Record, follow up, and reconcile: Record in accounts receivable, follow up for payment as needed, and reconcile against the customer’s balance

Example: Accounting impact

  • Original Invoice = $1,000
  • Debit Memo = $150
  • A/R After Debit = $1,000 + $150 = $1,150

Integrating with existing invoice systems

  • Create debit memos directly from original invoices
  • Automate taxes and service-charge calculations
  • Sync A/R and reporting modules with approval logs
  • Maintain time-stamped audit trails

Debit memo template and examples

When creating a debit memo template, these are the essential fields to include:

  • Debit memo number
  • Date issued
  • Customer information, including name, address, contact information
  • Original invoice number
  • Description of additional charges
  • Reason for the debit
  • Total debited amount
  • Approval signatures
  • Payment terms

Sample debit memo template

Customize this template with your company’s information and the specific needs for each debit:

Your company name:
Address:
Phone:
Email:
Date issued (MM/DD/YYYY):
Debit memo #:
Bill to - Customer name:
Bill to - Address:
Bill to - Contact:
Original invoice #:
Original invoice date (MM/DD/YYYY):
Item/service (additional charge):
Quantity:
Unit price:
Reason for debit:
Total debited amount:
Authorized by (Name, Title):
Payment terms (e.g., Net 30):

Tips for clear communication

Asking your customers for additional funds isn’t always easy. Follow these tips for effective communication around debit memos:

  • Use a polite, professional tone
  • Explain the reason for the debit memo in plain language
  • Attach supporting documentation or references
  • Start with the correct contact to avoid delays

Best practices for managing memos

As memo volume grows, disciplined processes reduce errors, speed reconciliation, and strengthen your audit trail.

Recordkeeping requirements

Keep complete documentation for every credit or debit memo. Include customer details, the related invoice, the reason, the amount, and supporting evidence. Ensure all changes and approvals are time-stamped with the names of the people involved. Retain records for the period required in your jurisdiction—often five to seven years—and use digital archives so files are easy to find during reviews or audits.

Internal controls and approval processes

Separate responsibilities so the person who creates a memo isn’t the one approving or recording it. Set approval thresholds so small adjustments can move quickly, and escalate larger items. Review activity periodically to spot trends, anomalies, or fraud indicators and refine your workflow based on what you find.

Software and automation options

Automate repeatable steps like creating memos from original invoices, calculating taxes or service charges, routing for approval, syncing to A/R, and maintaining time-stamped logs. Integration reduces manual entry, enforces rules, and gives teams a shared view of status.

Common mistakes to avoid

As creating and managing credit and debit memos becomes more routine, it can be easy to overlook certain steps in the interest of moving things forward. These are the most common mistakes to keep in mind and avoid:

  • Timing issues: Delays cause reconciliation gaps and slow the close
  • Documentation errors: Missing or inconsistent details lead to disputes
  • Communication failures: Surprises for customers or internal teams stall payment application
  • Reconciliation problems: Unmatched memos inflate balances and create month-end churn

How Ramp helps you track credit and debit memos

Understanding the difference between credit memos versus debit memos can be confusing. Especially, as the daily operations workflow of a small business can be chaotic. Just remember that sellers issue credit memos to recognize payments made by buyers, and debit memos are issued to recognize payments received from buyers.

If you’re working with a stack of credit and debit memos to manage, Ramp’s expense management software simplifies and streamlines small business accounting tasks for you, including the tracking and reconciliation of credit and debit memos.

Our platform automates much of the accounting process, providing you with real-time insights into your financial picture, from spending to cash flow. This means more time to focus on your customers and grow your business.

Learn more with our free, accountant-approved guides, examples, and templates for credit memos and debit memos.

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Emily HerFormer Growth Associate, Ramp
Emily drove Ramp's product-led-growth in multiple products and services. She brought forth the best of her experiences as a management consultant, startup co-founder, and designer to improve customer experiences with Ramp.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

FAQs

Credit memo is short for credit memorandum. It may sound like it’s a credit to your business, but it’s actually in reference to the buyer. It gives your customer a credit to their account balance.

No, a debit memo is not a refund. It’s a document that increases the amount due for a customer, typically because of underbilling, additional charges, or adjustments to previous transactions.

The seller issues a credit memo to the customer, crediting or refunding returned or damaged products, overpayments, and other payment discounts. Either sellers or buyers issue a debit memo to request additional payment.


Credit and debit memos don’t have a formal expiration date, but customers should use them within a reasonable timeframe. Over time, they can become harder to reconcile and less useful during audits.

That depends on perspective. For a seller, a credit memo means they owe the buyer money, which can be negative; for the buyer, it’s positive. Debit memos are the opposite—positive for a seller expecting more payment, negative for a customer who owes more.

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