What is Credit Memo? and What is Invoice?

credit memo vs. invoice. Let's find out what's different, what's the same, and how to use both to do accounting as well as possible without buying accounting software.

So, if you want to tell two things apart, you have to learn everything you can about each one on its own. So, let's look at what each of a credit memo and an invoice is.

What is a Credit Memo or Credit Note?

The term credit memorandum has been shortened to credit memo. Alternatively known as a credit note.

The definition of the credit in the textbook A memo is an accounting document provided by the seller to the client to inform them of their account's positive balance.

When a consumer has paid more than the value of the services or goods received, the company issues a credit note to represent the difference.

 Let's illustrate with a sample credit memo.

A client commissioned you to renovate his bathroom. You had agreed upon a price estimate of $20,000, which he had paid in advance. Now, for some reason, the project was finished for only $19,000.

So, you will need to generate a credit memo to recognise his $1000 over credit amount.

Now you may be wondering what situations need the issuance of credit memos, right?

Thus, let's analyse when credit memos are required.

When to Issue Credit Memos

In many instances, your accounts payable department must generate credit memos. So, you must understand when to send credit memos.

• When a customer returns something or declines your services and requests a refund.
• When the price drops and the buyer has already paid in advance.
• While attempting to resolve price conflicts.
• When the service's scope is modified, resulting in a decrease in your accounts receivable amounts.

In general, if the seller owes the client money, the seller must create a credit memo. A credit memo generator can be used to quickly create credit memos.

But couldn't he/she simply call the customer and relay the same information?

Uh no! And here is why.

What’s the Purpose of Credit Memos?

Sure, it is true that the contractor can simply advise the customer over the phone of the positive credit balance, but this is not the only function of a credit memo. So, let's learn more about it.

• Balancing accounting records If the contractor does not send credit memos, how will he/she explain a customer's extra payment? The credit note justifies the positive amount remaining in customers' accounts, so aiding in the preparation of journal entries.
• Future audits At the time of an audit, credit memos aid in comprehending the transactions performed in an account.
• Bookkeeping Contractors need to bookkeep every transaction and credit memos help them bookkeep transactions like refunds or credit points.

Now that you have an understanding of credit notes, let's discuss the invoice.

What is an Invoice?

An invoice is a legally enforceable accounting document delivered by the seller to the consumer for the purpose of requesting payment for the provided products or services. While this is its principal function, it also serves many subsidiary functions, which we will explore momentarily.

A bill informs clients of how much they owe the seller, what they must pay, when payment is due, and how to pay.

Hence, each company transaction is required to provide an invoice.

When to Issue Invoices

Throughout the duration of a contract, the contractor is required to produce and send multiple invoices. This depends heavily on the terms of the contract and any past agreements between you and your client.

Nonetheless, we will cover the most typical times to send invoices, from which you can select the one that best fits your business.

• Upon Completion of the Service This is the most frequent occurrence, as clients are more likely to pay after receiving your services. If the client is pleased with the work, there is a larger likelihood of prompt payment processing. This sort of invoice is often referred to as a credit invoice.
• During the Project Typically, the gross amount of a contract is too enormous to be processed in a single transaction, and not every contractor can afford to commit such a large amount of capital up front. Hence, contractors issue interim invoices following the completion of each significant project milestone in order to divide the entire sum into smaller payments and better manage their cash flow.
• Prior to the Service Beginning As mentioned in the preceding section, the contractor must invest substantial funds at the commencement of a project. Consequently, contractors submit an invoice prior to the commencement of service to request a partial or full advance payment, depending on the arrangement.

What’s the Purpose of Invoices?

Preparing an invoice is one of the first skills accountants must acquire, as it serves numerous objectives that benefit both the firm and the customer. Thus, let's learn some of them.

• Bookkeeping : Invoices are recorded for bookkeeping and keeping track of business sales.
• Accounting: records Invoices aid in documenting corporate transactions and accounting management.
• Legal purpose: As invoices are legally binding, you must create professional invoices to prevent a lawsuit against your organisation.
• Managing Inventory: As a result of a record of the products and/or services sold on an invoice, you are able to precisely gauge your inventory levels.
• Brand marketing : An invoice is an excellent opportunity to promote your brand. Provide all of your services, brand logo, and contact information. It contributes much to increasing client loyalty.

An invoice is the accounting document used for requesting payments. Whereas, a credit memo is the accounting document used for informing clients about the positive balance they have in the account.

Difference Between Credit Memo and Invoice

What does it show?

• A positive balance in the customer’s account(CM).
• The amount a customer owes to the contractor(I).

When is it issued?

• When the: customer demands a refund, rate changes, scope changes(CM)
• When the contractor sells services/products(I).

At what time is it issued?

• Mostly, after the customer has paid the amount.(CM)
• Whenever the contractor wants to request a payment.(I).

What does it include?

• Customer’s information, Contractor’s information, Issuing date, Credit memo number, Original invoice reference number, Item list with description, Total positive balance(CM)
• Customer’s information, Contractor’s information, Date of issue, Invoice number, Purchase order reference number, Itemized list of products/services provided, Total accounts payable(I).

Who owes the total amount to whom?

• The contractor owes the customer.(CM)
• The customer owes the contractor.(I).

Go On, Tell Us What You Think!

Did we miss something? Come on! Tell us what you think of this article on what is an invoice in the comments section. In the comments box, please tell us what you think of this article about what an invoice and a credit memo are.