Skip to main content

CREDIT MEMORANDUM

 

Credit memorandum or credit memo is a document issued by seller to the buyer, which acts as the source document for the sales journal. The document is the proof for reduction in sales. This document informs the buyer that the seller will decrease or credit the amount the buyer owes to seller in the trade receivables in seller’s account.

Example- Let’s discuss this in detail with an example. Company A is a manufacturing company with provides goods to company B. These two companies have a track record and have been doing business for some time now. A has dispatched certain quantity of goods to B. Sales team of A has received new price list of products. The new prices are actually lower than the past prices. This may be due to various reasons like decrease in raw material cost, decrease in overheads and so on. The company would have charged as per past prices to B and B would have cleared account or not. In both scenarios the company A will send a Credit Memo to company B stating that B should reduce the amount they owe A, the decrease in price of products should be the amount mentioned and company A will reduce the same amount in their amount receivables. The credit memo will be in opposite direction if the prices of products shipped to Company B have increased.

Usually credit Memo comes into picture if the client has paid more or less than the actual price of the goods or services taken. It is a document prepared to adjust the errors made in the sales invoice which has been already processed and sent to customer. The seller will inform buyer how much extra he has paid in the document and he can keep the count of it during the next transaction.

 

Components of Credit Memo

A credit memo is similar to that of a sales invoice and contains following components usually in a product oriented industry. The detailing and particulars in the credit memo makes it significant and hence the usage of same of universal and globally accepted across all sectors and industries globally.

1.      Purchase Order number(PO)

2.      Terms of payment and bill

3.      Shipping address of list of items

4.      Price of each item

5.      Quantity of each item.

6.      Date of purchase

7.      Total value of the transaction

8.      Total discounted amount in terms of each product.

 

 

 

 

 

Below is the picture of a typical credit memorandum. We can see the parameters mentioned above in the particular format. IMG SRC- Google

 

Significance of credit memo

Sellers use credit memo instead of using a discount to save money. When sellers want to discount the price for buyer, they are able to do only at invoice level. This created confusion in the seller’s books of account when he is required to track back the particular product which was discounted. Also during calculating sales tax revenue summary it is difficult to break down for discounted products. To avoid such fuzzy business credit memo is issued.

The reduction of price in credit memo will be specified at a product level and are easy for transaction also. Seller can also track back the discounted product with ease in the case of credit memo. The components listed in above section will throw insight on how detailed invoice a credit memo will be.

There are variety of reasons why a seller will use credit memo

·       Buyer might return few or all purchased item to the seller.

·       Items delivered might be defective, wrong size, colour in other words the delivery doesn’t meet the buyer’s expectations.

·       Buyer has new kind of requirements for the same shipment from same seller.

·       Change is price of items shipped to buyer.

·       When an invoice amount is overstated.

·       The discount is not applied properly on the products.

·       When the delivered goods or products gets spoiled or damaged before their expiry tenure.

 

The above said reasons makes credit memo important for conducting business transaction of buy and sell. In other words credit memo is the opposite of the invoice which is generated and given to the buyer by the seller of the product or provider of service. Unless invoices, credit note cannot be pledged to liquidate it.

 

Limitations of credit Memorandum

·       When applying for credit, total number of invoices should be less than or equal to 1000.

·       When revoking the credit memo also the number of invoices should be less than 1000.

·       Credit memo issuance will incur overage smoothening rollover charge.

·       The transaction also considers the ethical trust between the two parties in the business.

·       Buyer might wrongly argue about the delivered goods with the sole purpose of availing credit memo facility.

 

Advantages if credit memo

·       Memo is created with a single click and is easy to document rather than doing manual entries which will require more time and HR.

·       No Need to manually create negative revenue for the projects to create a credit note.

·       Single entry containing all particulars of the business transaction and thus easy to track in the book of accounts.

·       In case of tracking back for discounted products, it is easy when credit note is used instead of just an invoice.

·       It is nothing but the invoice receipt of sale but in exact opposite direction in terms of book of accounts.

·       It decreased the number of journal entries in the account which in turn makes it easy for tracking and reporting.

Conclusion

Credit note makes the business transaction between buyer and seller happen in a smoother way. It might incur some charges but compared the advantages it has when compared to the invoice receipt, credit note is handy. It can be credit or debit depending on the price fluctuation from the actual price. Price volatility of products over the course of time will decide the credit memo frequency between the two parties. Overall it can be concluded that credit memo when used makes the back tracking of particular product’s discount history easy for the seller. The seller will increase or decrease his receivable depending on the credit memo total amount.

Comments

Post a Comment

Popular posts from this blog

SHAREHOLDER

  SHAREHOLDER A person who legally owns one or more shares of stock in a public or a private corporation. A shareholder can be an individual or an institution. In layman terms a shareholder is the owner of the company. The number of shares he/she holds defines his/her percentage of ownership of the company. The law defines the shareholder only after his/her name or the entity’s name (in case of institution) is mentioned in the company’s register of shareholder or members. Shareholders of a company or the corporation are legally separate from the corporation itself and thus are not liable for the corporation’s liability. Until and unless the shareholder has offered guarantee, he/she has limited liability to the unpaid share price underlying. Shareholder can acquire share either from primary market (during the IPO of the company) and thus provide the capital for the corporation or from the secondary market. Shareholders are considered to be the subset of stakeholders of the com...
Post a Comment
Read more

CLOSED ECONOMY

  CLOSED ECONOMY Closed economy is a type of economy where the import and export of goods and services doesn’t happen. Such economy has no trade activity from outside economics. Closed economy is self-sufficient economy, the sole purpose of the economy is to meet all the domestic consumers’ needs within country’s border. No trade activity is conducted outside the national borders in a closed economy. In practical there are no countries with closed economies at present. Brazil has the closest to the closed economy. It has the least import of goods compared to the countries from rest of the world. It is impossible to meet the all the goods and service demands with in the domestic boundary. With the globalization and technology dependency building and maintaining such economies can be a herculean task. It can be considered that India was a closed economy till 1991 and so are the other countries across the globe. At present it is not quite possible to run a closed economy. The ne...
Post a Comment
Read more

Statement of operations

Statement of operations Company’s overall performance is usually assessed by three financial statement. Balance sheet, cash flow statement are the first two and the last one is known as statement of operations. This is also known as income statement, profit-loss statement or statement of income. The statement of operations is to report the income of the corporation for that particular period. It records the income and expenses due to operations in a standard format accepted broadly. The format is common for all companies from all industries. The standard format and flow of statement of operations is as below. For the organization ABC and for the period, the income statement looks as below. The reporting period income statement can be quarterly, monthly or yearly as in case of other financial statements. How to create statement of operations? Consider a company with net sales of 5 million. The expenses (COGS and Operating expense) for the company are removed from net sales to arrive at ...
Post a Comment
Read more