Credit memos and receivable adjustments

The right tool for returns, agreed reductions, and bad debt — and why a credit memo beats editing or voiding an invoice the customer has already seen.

How-toFor Bookkeepers, Firm staff

Choosing the right instrument

Situation	Use	Why
Invoice issued in error, never sent, no payment	Void	Nothing to explain to the customer.
Customer returned goods, or you agreed a reduction	Credit memo	Their statement should show the charge and the credit — that is the honest record.
Invoice is uncollectible	Bad debt write-off	It was genuinely revenue; the loss is a bad debt expense, not a reduction of sales.
Small rounding or short payment you accept	Receivable adjustment	Clears the residue without pretending the sale was smaller.
Wrong amount, invoice already sent	Credit memo, then reissue	Preserves the trail the customer has already filed.

Issuing a credit memo

1
Create it against the customer, referencing the original invoice.
2
Mirror the original lines for the portion being credited.
Crediting to the same accounts the invoice used is what keeps the reversal clean. Crediting the whole thing to a generic account distorts your revenue mix.
3
Include the sales tax portion if tax was charged.
Forgetting this leaves you having remitted tax on a sale that was partly reversed.
4
Write the reason.
It appears on the customer's statement and in your records, and it is the first thing anyone asks about.
5
Apply it to the invoice, or leave it as an open credit.
6
Send it.

Writing off bad debt

Write off a receivable when you have concluded it will not be collected — not when it is merely late. Writing off too early hides a collections problem; writing off too late overstates assets.

Reasonable triggers:

The customer has ceased trading or entered insolvency.
Collection efforts have been exhausted and the amount does not justify legal action.
The balance has aged past a threshold your policy defines, and nothing suggests it will be paid.
The amount is too small to pursue and has sat for months.

Common questions

Can I just void the invoice instead?

Only if it was never sent and never paid. Voiding an invoice the customer has already recorded creates a mismatch between your books and theirs, and it removes evidence that the sale happened at all.

How do I refund a customer in cash for a credit?

Issue the credit memo, leave it as an open credit, then record a payment out that applies against it. That way the credit and the cash are separately visible.

Do credit memos affect sales tax?

Yes, when the original sale carried tax. Include the tax portion so your liability reflects the net sale. If the tax was already remitted, the credit reduces the next period's liability.