What is a credit memo?

A credit memo, sometimes called a credit note, is the document a seller uses to formally reduce or cancel an outstanding invoice. It might be a partial reduction (a $200 credit applied against a $1,000 invoice for a service shortfall) or a full one (a $1,000 credit that effectively cancels the invoice). The credit memo is the accounting record of that adjustment.

Credit memos exist because once an invoice has been issued, it cannot be modified retroactively without breaking audit trails. The proper way to reduce an invoice is to issue a separate credit memo against it. The customer's account on your books reflects the original invoice plus the offsetting credit, leaving the net balance owed.

Common reasons for a credit memo: agreed scope adjustment after the work, return of goods, duplicate billing that needs to be reversed, pricing concession negotiated post-invoice, or write-off of a small uncollectible balance. Each accounting software tool has a workflow for issuing credit memos that ties them to the original invoice for clean reconciliation.