When you sell a product or service on credit, you can either issue credit notes or credit memos to your customers, depending on the circumstances. Each of these two financial documents have their own uses, so it’s important to know when to use each one. In this article, we’ll discuss the difference between the two and look at some instances where each might be used. When Should You Issue a Credit Note or Credit Memo?
What is a credit memo?
Simply put, if you owe money to your customer (because of product returns), you issue them a credit memo instead of asking for cash. A credit memo acts as evidence that you’ve already been paid for those products and therefore cannot request money from your customer again. It helps eliminate paperwork during accounts payable audits, too. But what about credits (or removals) due to errors in invoicing? These are called credit notes, not memos.
Credit Notes and Credit Memos Compared?
A credit note is different from a credit memo in that it is issued as soon as an error has been made. An example would be where goods are missing or incorrect. The seller may use a credit note to give cash back to their customer for goods not delivered, for example if they have run out of stock. In contrast a credit memo is used when you want to make changes or corrections on an order after delivery, such as size alterations. It is important you know your legal rights when issuing either type of document. The Consumer Rights Act covers both credit notes and credit memos. Although there isn’t a direct reference to either a credit note or a memo in law there are numerous pieces of legislation which come into play.
When should you issue a credit note/memo?
When a customer returns a product and does not pay for it, you issue a credit note/memo to adjust your sales revenue. A credit note must be given to customers within five days from when they returned their products to you. If you do not give out credits notes in time, you will have difficulties with taxes and finances. Remember that if a customer is dissatisfied with your product they can return them without giving any reasons. So remember to send back your goods within 5 days of receiving them as this demonstrates that you are a serious company who cares about its customers. If you decide to change prices of any products then send out a new purchase order notification as soon as possible.
Why would you need to issue a credit note/memo?
The purpose of issuing a credit note/memo is to return money to your customer because you have made an error, such as charging too much for an item. Not only does it reduce your inventory, but also creates goodwill with your customers and decreases bad debt that would otherwise be passed on to customers in higher interest rates and fees. By giving customers their money back for overpayment, you are taking one less dollar out of their pockets while keeping them loyal to your company. This can lead to increased sales in the future when they know you will do right by them. To avoid negative feelings towards your company from being magnified by social media outlets, issue these notes within 24 hours of any errors being discovered. Returning funds directly through a check, which allows for an immediate refund, makes customers feel even better than issuing store credits. Providing good customer service should always be a top priority! When deciding whether or not to issue a credit memo or note, examine previous purchases from each customer involved in each incident. If there is normally a pattern of regularly paying for significantly more items than they actually purchase every time, no action may need to be taken.
SOURCE: Difference between Invoice And Credit Memo
