A credit memo is an adjustment in the invoice, reducing the outstanding customer balance. One type of credit memo is issued by a seller in order to reduce the amount that a customer owes from a previously issued sales invoice. For example, assume that Company ABC had issued a sales invoice for 800 for 100 units of product that it shipped to Company XYZ at a price of 8 each. Company XYZ informs Company ABC that one of the units is defective and issues a credit memo for 8. The credit memo will cause the following in Company XYZ accounting records: 1) a debit of 8 to Sales Returns and Allowances, and 2) a credit of 8 to Accounts Receivable. In other words, the credit memo reduced Company ABC net sales and its accounts receivable. When Company XYZ records the credit memo, the following will occur in its accounting records: 1) a debit of 8 to Accounts Payable, and 2) a credit of 8 to Purchases Returns and Allowances (or Inventory).

Think of a credit memo as store credit! Businesses who have an unsatisfied customer, perhaps from a defective product or an error in delivery or an invoicing mistake, will often issue a credit memo. As an A/R specialist, you may not be able to adjust the original invoice, especially after delivery or if the invoice is past 30 days. Show the interviewer that you have worked with credit memos in the past. If you are new to your A/R career, show that you understand the purpose of a credit memo.

"A credit memo is issued to a customer, in a variety of circumstances, to reduce the balance that the customer owes. Credit memos allow for the fixing of errors without issuing a refund to a customer. I have issued many credit memos in my day and am aware of how to record these in most accounting systems."