Credit Memo Journal Entry
Overview
The company sometimes may issue the credit memo to the customers in order to reduce the amount they owe the company for various reasons such as goods returned, discount, or invoice error that leads to overstatement of the sale amount, etc. In this case, the company needs to make the credit memo journal entry in the accounting record in order to reflect the actual accounts receivable on the balance sheet as well as the total net sales revenue on the income statement.
Credit memo is also used in the bank to increase the balance of the bank’s customer account. For example, the bank may issue a credit memo for the notes collected on behalf of the customer. In this case, the balance of the customer account will increase by the amount collected.
Credit memo journal entry
Goods returned
The company can make the credit memo journal entry for the goods returned by debiting sales returns and allowances account and crediting the accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Sales returns and allowances | 000 | |
| Accounts receivable | 000 |
Sales returns and allowances account is a contra account to the sales revenue. Likewise, this journal entry will reduce both the net sales revenue on the income statement and the total assets on the balance sheet by the same amount.
Discount allowed
If the company issues the credit memo for discount purposes, it can make the journal entry for credit memo by debiting the discount allowed account and crediting the accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Discount allowed | 000 | |
| Accounts receivable | 000 |
The same as the sales returns and allowances account, the discount allowed account is also a contra account to sales revenue. Hence, this journal entry will also result of reducing the net sales revenue and total assets of the company.
Correcting overstated amount in the invoice
If the company issues a credit memo to a customer to correct an error that makes an overstatement of the sale amount, it can make the journal entry for such a credit memo by debiting the sales revenue account and crediting the accounts receivable.
| Account | Debit | Credit |
|---|---|---|
| Sales revenue | 000 | |
| Accounts receivable | 000 |
Credit memo example
For example, on June 7, the company ABC issues a $1,000 credit memo to one of its customers for the goods that are returned due to the damage. The goods were sold on credit for $1,000 in the previous week and the customer had not made the payment yet.
In this case, the company ABC can make the journal entry for credit memo by debiting the $1,000 in sales returns and allowances account and crediting the $1,000 in accounts receivable to reduce the amount that the customer owes.
| Account | Debit | Credit |
|---|---|---|
| Sales returns and allowances | 1,000 | |
| Accounts receivable | 1,000 |
In this journal entry, net sales revenue on the income statement and total assets on the balance sheet reduce by $1,000.
Note:
It is useful to note that when the company does not have the sales returns and allowances account or discount allowed account due to various reasons, the company can just debit the sale revenue account directly for the credit memo journal entry.
For example, if the company ABC in the example above doesn’t have sales returns and allowances account, it can make the journal entry as below instead:
| Account | Debit | Credit |
|---|---|---|
| Sales revenue | 1,000 | |
| Accounts receivable | 1,000 |