How and When to Use a Credit Invoice

The credit invoice, also called a "credit memo," is a useful tool in small business, both to sellers and buyers. The document is typically issued when the amount due from a client is reduced, but can also be used in other situations. Here are several instances where a credit invoice might be used:

1. Returned Goods – If a customer returns goods for which they have been previously billed, a credit memo may be issued to correct the amount due from the customer. This type of credit memo is important to both the buyer and seller not only for tracking receivables and payables, but also for inventory tracking and recordkeeping purposes. It is a good practice to clearly state on the credit invoice the reason for the return. For instance, was the product defective or spoiled, or was the customer simply unhappy with the product?
2. Promotional Discounts – In some cases a seller may wish to give a particular buyer a break on the cost originally billed in order to establish good will and customer loyalty.
3. Pricing Disputes – There are occasionally times when a buyer contests the price they are billed. This situation can be resolved through an informal agreement between the parties, binding mediation, or a legal proceeding. If the result is a reduction in the price originally invoiced, a credit invoice may be issued.
4. Errors with the Original Invoice – In some instances, the individual who created the original invoice makes an error. A credit memo is an easy way to correct this situation.
5. Customer Prepayments – In some cases, a customer will want to make a prepayment on their account before the invoice has been processed. A credit memo will function as a receipt for the client, showing their prepayment until the invoice is completed.
6. Balance Write-Off – Credit invoices are sometimes used as an internal memo, used to make adjustments to the accounts receivable balances. This might occur when a debt becomes uncollectable and the seller decides to write off the outstanding balance. This can also be done if a customer sends a payment that is a little short and the seller decides not to bother collecting it.

If your company will be doing a lot of invoicing, be sure to use a high-quality online accounting program, which can help keep credit memos organized.