How to create a credit memo in QuickBooks
As a small business owner, managing finances is no small task. And while its one of your most important financial responsibilities, maintaining accurate records of transactions like credit memos is daunting — especially if you’re using QuickBooks for the first time.
In the step-by-step video tutorial below, you’ll find out how to create a credit memo in QuickBooks to make financial management easier. You’ll also learn some best practices to simplify your processes, like turning on automated credit applications.
By the end, you’ll be handling credit memos like a pro! Let’s get started.
What is a credit memo and why is it important?
A credit memo is essential for maintaining accurate financial records and healthy relationships with customers. This is especially true when reconciling transactions related to a purchase order.
A credit memo is issued by sellers to buyers. When you send this document to a customer, you’re informing them of a reduction to the amount they owe your business. In other words, you can think of a credit memo as a “negative invoice.”
But why would anyone want to do this, and why is it important for you to understand how to create a credit memo in QuickBooks?
- Balancing overpayments: Credit memos primarily address instances where customers overpay. They let you rectify financial miscalculations without jumbling up your records. This simplifies the process to ensure accurate account balances and satisfied customers.
- Managing returns: When a customer returns an item or requests a refund, credit memos adjust financial records without altering your original invoices. As a result, you maintain clarity and consistency in your records, making them easier to monitor.
- Financial record accuracy: Instead of editing past invoices, which often distorts financial history, credit memos provide accurate and transparent balance adjustments for customers. Preparing for tax season is difficult enough without having to decrypt old financial documents.
How is a credit memo different from a refund or delayed credit?
You should issue a credit memo when you bill a customer for goods and services, but then need to adjust the original invoice due to overpayment or incorrect information. Put simply, it serves as an adjustment or correction of an already existing invoice.
On the other hand, you issue refunds when a customer purchases goods or services from your business that do not meet their expectations. Typically, a refund involves returning payment for an incomplete service or defective product.
Finally, you can issue delayed credits through your customers’ invoices, and they won’t apply until a future date. You just enter them as a line item and specify the date you want to apply credit. So, if your customer overpays or prematurely send you funds, issuing delayed credits makes you and your customers even and keeps your books accurate.
How to create a credit memo in QuickBooks: Step-by-step video tutorial
Knowing how to create a credit memo in QuickBooks maintains transparency and trust between your business and customers.
Following this step-by-step demonstration outlining how to create a credit memo in QuickBooks, you ensure financial accuracy, even as you face speed bumps in your cash flow.
Creating a credit memo in QuickBooks
Here’s how to create a credit memo in QuickBooks
- Navigate to “New” and select “Credit memo.”
- Find your chosen customer and identify the products or services related to the credit.
- If the credit is connected to an original invoice, use the same items from that invoice on your memo.
- Determine the credit amount.
- Click “Save and send” to share the memo with your customer immediately, or just hit “Save and close” for future use.
Applying a credit memo to an invoice
Credit memos can greatly impact a customer’s outstanding balance when you apply them to invoices. Here’s how to accomplish this in QuickBooks:
- Open your customer’s record to view their transactions.
- If they have an open invoice, choose “New,” then “Receive payment.”
- Enter the customer’s name. QuickBooks will pre-select their oldest open invoice and the associated credit memo.
- If you want to apply credit to a different invoice, deselect the auto-chosen credit memo and invoice. Then choose the invoice you want instead.
- Select the credits to apply, setting “Amount received” to 0.
- Adjust the payment amount if you’re not applying the full credit.
- Click “Save and close.”
Turning on automated credit application
You can automate your credit application process in QuickBooks to always apply credits to a customer’s oldest open invoice:
- Navigate to “Settings” then “Account and settings.”
- In the “Advanced” section, click “Automation.”
- Enable the “Automatically apply credits” checkbox.
- Click “Save,” then “Done.”
How to track credit memos in QuickBooks
Tracking credit memos ensures accuracy and smooth financial operations. When you apply a credit memo, QuickBooks marks the corresponding invoice as “Closed” — or “Partially closed” if a balance remains.
Review customer balances and open transactions regularly to monitor and manage these credit memos efficiently. That way, there won’t be any confusion when you and your team go over your finances.
QuickBooks credit memo FAQs
What should I include in a credit memo?
Essential components of a credit memo include the:
- Customer details including name and address.
- Date of issue.
- Credit memo number for internal tracking.
- Details of your products/services.
- Amount to be credited.
- Reason for the credit.
What accounts does a credit memo affect in QuickBooks?
In QuickBooks, a credit memo affects these accounts:
- Accounts receivable: Reduces the amount a customer owes you.
- Income account: Reduces your income since you’re reversing a sale.
How do I apply a credit memo to a payment in QuickBooks?
Here’s how to apply a credit memo to a payment in QuickBooks:
- Open QuickBooks and go to the “Receive Payments” section.
- Choose the customer’s name. You’ll see their outstanding invoices and available credits.
- By default, QuickBooks applies the credit to the oldest open invoice. To change this, deselect the credit and invoice, and then pick the appropriate invoice.
- Tweak the payment sum if needed.
- Click “Save and close.”
Automate your workflows. Start your free trial with Method.
Image credit: Nampix via Adobe Stock