A credit memorandum is the full name of a credit memo, a document a seller issues to a customer to reduce the amount the customer owes. It is used most often when goods are returned, when an allowance is granted for damaged or incorrect goods, or when an invoice overcharged the customer. The main entry explains how credit memos are triggered and recorded.
Two settings for the term
In trade, the seller records a credit memorandum by debiting a contra revenue account such as sales returns and allowances and crediting accounts receivable. The buyer records the mirror entry, reducing accounts payable. In the UK and many other countries, the same document is usually called a credit note.
Banks also use the term. A bank credit memorandum appears on a bank statement when the bank adds money to a customer's account for something other than an ordinary deposit, such as interest earned or the proceeds of a note it has collected for the customer. When preparing a bank reconciliation, the business adds such items to its own cash records if it has not yet recorded them.
The opposite document is a debit memorandum, which increases what a customer owes or, in banking, reduces an account balance for items such as service charges or returned cheques.