To create a credit memo in QuickBooks Online, go to the + New button, select Credit memo under Customers, choose the customer, add the products or services, and then Save. After saving, you can either apply the credit to an open invoice or keep it as a customer credit for future use.
What Is a Credit Memo and When Do You Need One?
A credit memo (sometimes called a credit note) is a document you give a customer when you owe them money. In QuickBooks Online, it reduces the amount they owe you or creates a balance you can apply to future invoices. You typically issue one when a customer returns goods, when you give a discount after the sale, or when you overcharged them on an invoice.
For example, if you invoice a customer for $500 but they return a $100 item, you create a $100 credit memo. That credit can be applied to the original invoice, bringing the balance down to $400, or it can sit on the customer’s account for their next order.
How to Create a Credit Memo in QuickBooks Online (Step-by-Step)
Here is the standard workflow for creating a credit memo in QuickBooks Online:
- Click + New (top left).
- Under Customers, select Credit memo.
- Choose the Customer from the dropdown. If you haven’t set up the customer yet, add them first.
- Pick a Date for the credit memo (usually today’s date or the date of the return).
- Select the Product/Service being credited. If you use inventory, QuickBooks will increase your stock when you save the credit memo.
- Enter the Quantity and Rate – these should match the original sale.
- Review the Message shown on statement and Memo fields – these are optional but helpful for your records.
- Click Save.
After saving, QuickBooks gives you three options: Print the credit memo, Email it to the customer, or Apply to invoice. If you choose to apply it, you’ll see a list of the customer’s open invoices. Check the box next to the invoice you want to credit, and QuickBooks will reduce that invoice’s balance.
Applying a Credit Memo to an Invoice vs. Keeping as Customer Credit
You have two main ways to use a credit memo in QuickBooks Online:
- Apply to an open invoice – This is the most common. It pays down or fully pays a specific invoice. The invoice balance drops, and the credit memo is marked as “Applied.”
- Keep as a customer credit – If the customer has no open invoices, or you want to use the credit later, leave it unapplied. It will show as a credit on their customer profile, and you can apply it to a future invoice when you create one.
If you need to apply a credit later, open the invoice, click Receive payment, and then select the credit memo under Credits. Alternatively, go to the customer’s transaction list, find the credit memo, and click Apply.
Common Problems and How to Fix Them
Users often run into a few issues when creating credit memos. Here are the most common ones:
- Credit memo not showing up in the customer’s list – Make sure you saved it and didn’t just close the window. Check the Customer’s transaction report under Reports > Customer Balance Detail.
- Can’t apply credit to an invoice – The invoice must be open (not paid or partially paid). If the invoice is already paid, you’ll need to apply the credit to a future invoice or issue a refund instead.
- Wrong amount on the credit memo – If you entered the wrong quantity or rate, you can edit the credit memo as long as it hasn’t been applied or reconciled. Click Edit on the transaction.
- Inventory not increasing – If you use QuickBooks Online Plus or Advanced and track inventory, the credit memo should increase your inventory quantity. If it doesn’t, check that you selected the correct inventory item and that the credit memo is not in a pending state.
Credit Memo vs. Refund vs. Discount: Which One Do You Use?
It’s easy to confuse these three. Here’s the difference:
- Credit memo – Reduces what the customer owes or creates a positive balance for future use. No money changes hands.
- Refund – Gives money back to the customer, either by check, cash, or card. In QuickBooks, you create a refund from a credit memo by selecting Refund after saving the credit memo.
- Discount – Applied directly to an invoice to lower the amount due. This is often done at the time of sale, not after.
So if a customer returns an item and wants their money back, you’d create a credit memo and then issue a refund. If they want to keep the credit for their next order, you’d just leave it as a credit.
Credit Memo Template
Below is a generic credit memo template you can use as a starting point. Fill in the blanks with your business information.
| Credit Memo # | ________ | Date | ________ |
|---|---|---|---|
| Customer Name | ________ | ||
| Address | ________ | ||
| Reason for Credit | ________ | ||
| Product/Service | Quantity | Rate | Amount |
| ________ | ________ | ________ | ________ |
| ________ | ________ | ________ | ________ |
| Total Credit | ________ | ||
Sample (fictional): Credit Memo #CM-101, Date: 2025-03-15, Customer: Acme Retail, Reason: Return of defective item, Product: Widget A, Qty: 2, Rate: $25.00, Total: $50.00.
Frequently Asked Questions
Can I edit a credit memo after it’s been applied?
Once a credit memo is applied to an invoice, you can’t edit it directly. You would need to unapply it first by going to the invoice, removing the credit, then editing the credit memo. If the invoice has been paid or reconciled, you may need to reverse the transaction instead.
How do I void or delete a credit memo?
Go to the credit memo in the customer’s transaction list, click the dropdown arrow next to Edit, and choose Void or Delete. Voiding keeps a record with a zero amount; deleting removes it entirely. You can only delete if it hasn’t been applied or reconciled.
Does a credit memo affect my sales tax?
Yes. QuickBooks will recalculate sales tax based on the items on the credit memo. If you credit a taxable item, the tax liability is reduced. Make sure your tax settings are correct so the credit memo shows the right tax amount.
Can I email a credit memo to my customer?
Yes. After saving the credit memo, click Email and QuickBooks will open an email with the credit memo attached as a PDF. You can customize the message before sending.
What if my customer already paid the invoice in full?
If the invoice is fully paid, you can’t apply the credit to it. Instead, you can either issue a refund (if you owe them money) or leave the credit on their account for future purchases. To issue a refund, go to the credit memo and select Refund.
Final Tips for Managing Credit Memos
Keep your credit memos organized by using clear memo notes and consistent numbering. QuickBooks automatically numbers them, but you can customize the prefix in your sales settings. Regularly review your customer balance report to see any unapplied credits – these are liabilities you owe your customers. If you’re unsure about tax implications or accounting treatment, consult your accountant or a QuickBooks ProAdvisor.