A credit note or credit memorandum (memo) is a commercial document issued by a seller to a buyer. The seller usually issues a credit memo for the same or lower amount than the invoice, and then repays the money to the buyer or sets it off against a balance due from other transactions.
It can also be a document from a bank to a depositor to indicate the depositor's balance is being in event other than a deposit, such as the collection by the bank of the depositor's note receivable.
A credit note lists the products, quantities and agreed prices for products or services the seller provided the buyer, but the buyer returned or did not receive. It may be issued in the case of damaged goods, errors or allowances. In respect of the previously issued invoice, a Credit Memo will reduce or eliminate the amount the buyer has to pay. Note: A Credit Memo is not to be substituted as a formal document. The Credit Memo rarely contains: PO #, Date, Billing Address, Shipping Address, Terms of Payment, List of products with quantities and prices. Usually it references the original Invoice and sometimes states the reason for issue.
This is received if the goods are incomplete, damaged, or incorrect; you may also receive one if you have paid too much money, or you have been under charged.
To allow the buyer to purchase an item or service from that seller on a future date, i.e. a gift card or store card credit. Credit notes may be issued by a seller as a goodwill gesture to a buyer who wishes to return previously purchased merchandise (instead of cash repayment) in circumstances where the original sales agreement did not include an explicit refund policy for returned items. In such circumstances, a credit note of value equal to the price of the returned item is usually issued allowing the buyer to exchange his purchase for other items available with the sale.
To correct an invoice that has already been processed and sent to the buyer. If you have already sent an invoice to a buyer but now need to provide a credit for that invoice, you would send them a credit note or credit memo. You can think of a credit note as a "negative invoice." It can be used in some Enterprise Resource Planning software.
For accounting purposes in the case of returned goods. After the sale, if the customer is not happy with the purchased goods for various reasons, such as damage, or if a product has expired (for example, food items), he would return the goods. This transaction has to be reversed for accounting purposes.
From the point of view of a company, credit notes can be classified in two groups:
Credit notes sent to clients, issued by the company
Credit notes received from suppliers, issued by others
A credit note sent to clients is considered as a sales returned for accounting purposes. A credit note received from suppliers is considered as a purchases returned.