---
title: "What is credit memo?"
description: "Credit Memo explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero."
url: https://ledgerbpo.com/glossary/credit-memo/
updated: 2026-09-11
publisher: LedgerBPO (SS Support Network LLC)
language: en-US
---

# What is credit memo?

Glossary

A credit memo is a document that reduces the amount a customer owes, issued for reasons like a returned product, a billing error, or a discount agreed to after the original invoice was sent.

Updated September 2026

## How credit memo works

When a customer is owed a reduction, a credit memo is created referencing the original invoice and the reason for the adjustment. It can be applied against an open balance on that invoice, applied to a future invoice, or, in some cases, refunded back to the customer directly. A credit memo can also be issued for a volume discount agreed to after several invoices have already been sent.

Credit memos keep the accounting record clear by documenting exactly why a balance was reduced, rather than simply deleting or editing the original invoice. This matters for audit purposes and for understanding patterns, like a product that gets returned often or a recurring billing error that needs fixing at the source. Reviewing credit memo activity by reason code over time can reveal a recurring product or process issue worth fixing at the source.

## Example

A customer is invoiced $1,000 but returns $150 worth of defective product. The business issues a $150 credit memo referencing the original invoice. The customer's balance drops from $1,000 to $850, and the credit memo record shows exactly why the reduction happened, in case it is questioned later.

## Credit memo in QuickBooks Online vs Xero

QuickBooks Online lets you create a credit memo directly from the customer's profile and apply it to an open invoice or issue a refund. Xero uses a similar credit note feature, which can be allocated against an invoice or refunded through a bank transaction. Both keep a clear link between the credit and the original invoice. Both platforms keep a running total of unapplied credits available for a customer, visible whenever a new invoice is created.

## Related terms

- [Debit memo](https://ledgerbpo.com/glossary/debit-memo/)
- [Write-off](https://ledgerbpo.com/glossary/write-off/)
- [Invoice](https://ledgerbpo.com/glossary/invoice/)
- [All terms](https://ledgerbpo.com/glossary/)

## How LedgerBPO handles credit memo

We issue and apply credit memos accurately whenever a return, error, or agreed discount comes up, keeping the reason clearly documented for every adjustment. A dedicated accountant makes sure credits are applied to the right invoice and reflected correctly in your aging report. You get clean records your customers and auditors can both follow. We track credit memo reasons over time so recurring issues get flagged for a permanent fix.

[Get paid faster with a dedicated AR desk](https://ledgerbpo.com/services/accounts-receivable/)

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Source: https://ledgerbpo.com/glossary/credit-memo/ · Contact: https://ledgerbpo.com/contact/ · Full site map for agents: https://ledgerbpo.com/llms.txt