The journal entry for a received credit memo is a debit to the appropriate expense or asset account and a credit to accounts payable (or cash if you already paid). This reduces the amount you owe the supplier or increases the cash refund you receive.
What Is a Credit Memo and Why Do You Receive One?
A credit memo (or credit note) is a document issued by a seller to a buyer that reduces the amount the buyer owes. You typically receive one when you return goods, when the seller makes a pricing error, or when goods arrive damaged. The memo serves as the seller’s formal acknowledgment that your account balance is reduced. From your perspective as the buyer, it is a reduction in your accounts payable or a receivable if you already paid.
For example, if you ordered 100 widgets at $10 each and 5 arrive broken, the seller issues a credit memo for $50. That $50 reduces your outstanding balance. If you had already paid the full $100 invoice, the credit memo becomes a refund you are owed—an asset.
How the Journal Entry Works
The exact debit and credit depend on whether you have paid the original invoice. The core principle is: the credit memo reduces your liability (accounts payable) or creates a receivable (if paid).
- If you have NOT paid the original invoice: Debit the expense or inventory account (to reverse the original cost) and credit accounts payable (to reduce what you owe).
- If you HAVE paid the original invoice: Debit the expense or inventory account and credit cash (if the refund is immediate) or credit a receivable account (if you are waiting for the refund).
For example, suppose you received a $500 credit memo for returned defective raw materials, and you have not yet paid the supplier’s invoice. The entry is:
- Debit: Raw Materials Inventory $500
- Credit: Accounts Payable $500
If you had already paid, the credit would go to Cash (if refunded) or to a Due from Supplier account.
Step-by-Step Recording Process
- Verify the credit memo against the original invoice and the return or adjustment reason.
- Determine payment status—have you paid the original invoice?
- Identify the original account that was debited when you recorded the purchase (e.g., inventory, supplies, or an expense).
- Create the journal entry with the debit to that original account and the credit to accounts payable or cash/receivable.
- Update the subsidiary ledger for the vendor to reflect the reduced balance.
- File the credit memo with the original purchase documents for audit trail.
Common Scenarios and Their Entries
Different situations call for slightly different accounts. Here are three typical cases:
- Return of inventory: Debit Inventory (or Cost of Goods Sold if you already expensed it) and Credit Accounts Payable.
- Price adjustment (e.g., volume discount after invoice): Debit the original expense account and Credit Accounts Payable.
- Damaged goods that you keep but receive a partial credit: Debit the expense or inventory account for the credit amount and Credit Accounts Payable.
In all cases, the credit memo reduces your net cost. If the credit exceeds what you owe, the excess becomes a cash refund or a receivable.
Credit Memo vs. Debit Memo
A credit memo is issued by the seller to reduce the amount owed by the buyer. In contrast, a debit memo is issued by the buyer to the seller to increase the amount owed (e.g., for additional charges) or by a bank to a customer for fees. When you receive a credit memo, you are the buyer and your liability decreases. When you issue a debit memo, you are increasing what the seller owes you. Understanding this distinction prevents recording errors.
Common Mistakes to Avoid
- Recording the credit memo as revenue: A credit memo is not income; it reduces an expense or asset.
- Forgetting to adjust the original expense: If you expensed the full cost, you must reverse the portion covered by the credit.
- Mixing up accounts payable and cash: Only credit cash if you actually received a refund.
- Ignoring the credit memo: Unrecorded credit memos overstate liabilities and expenses.
Template for Recording a Received Credit Memo
| Date | Account Title | Debit | Credit | Memo/Reference |
|---|---|---|---|---|
| ____ | ________ | ____ | ____ | ________ |
| ____ | ________ | ____ | ____ | ________ |
| ____ | ________ | ____ | ____ | ________ |
Sample (fictional): On May 15, 2025, you receive a $200 credit memo from Vendor XYZ for returned office supplies. You have not paid the original invoice.
| Date | Account Title | Debit | Credit | Memo/Reference |
|---|---|---|---|---|
| May 15 | Office Supplies Expense | 200 | CM#1234 | |
| May 15 | Accounts Payable | 200 | CM#1234 |
Frequently Asked Questions
Can I record a credit memo as a negative expense?
Yes, some accounting systems allow you to enter a negative amount in the expense account instead of debiting it. The effect is the same: net expense decreases. However, using a debit to the expense account is more conventional and easier to audit.
What if I already paid the invoice and receive a credit memo?
If you already paid, you should debit the expense or asset account and credit Cash (if refunded) or a receivable such as Due from Supplier. If you don’t receive cash immediately, the credit creates an asset representing the refund you are owed.
Does a credit memo affect my income statement?
Yes, indirectly. Because you reduce an expense (or cost of goods sold), your net income increases for the period. It does not directly record revenue, but it lowers expenses, which boosts profit.
What if the credit memo is for a fixed asset I returned?
Debit the fixed asset account (or accumulated depreciation if the asset was used) and credit accounts payable or cash. The entry reduces the asset’s carrying amount and the liability.
Should I record a credit memo if I don’t plan to return the goods?
Yes, if the seller issues a credit memo for any reason (price adjustment, damage allowance), you must record it to reflect the true cost and liability. Ignoring it would overstate your expenses and payables.
Can I use the credit memo to offset a future invoice?
Yes, many suppliers allow you to apply the credit memo to future purchases. In that case, you still record the credit memo when received, and when you apply it later, you debit accounts payable and credit accounts payable (or cash) to clear the balance.