The Difference Between An Invoice & Credit Memo

Credit memos, invoices, and refund slips are vital to the working of routine businesses. A deft understanding of these ensures smooth cash flows even when the road to a successful business is full of fiscal bends and bumps. An important place to start is to recognize the difference between an invoice and a credit memo.

What Is An Invoice?

• An invoice is an itemized commercial document that’s sent to a customer by a vendor or seller. It’s a billing document that contains the list of goods or services supplied in a sales transaction
• For each item or service, the price is listed next to the entry. It also specifies the total amount billed
• The information listed on a bill must corroborate with that listed on the purchase order. A purchase order is a legally binding document specifying details of goods/items ordered by a purchaser
• The amount listed on a receipt must be approved before any payment can be made. The accounts payables (AP) department is responsible for the collection of the invoice. The AP staff approves the payment by reconciling the bill with the purchase order that the company originally sent 
• Traditional invoices are manually generated. However, these manual invoices can be now created via invoicing software. Using an invoicing software makes the process a lot quicker and error-free

What Is A Credit Memo?

In an instance where the items and their price listed on a bill of sale match perfectly with those listed on the purchase document, the payment will soon be cleared. However, there are many instances where goods or items purchased by a customer are returned to the vendor. There can be several reasons for the return.

• The item doesn’t match the order
• The item has defects
• The customer changes his mind

When a vendor receives a purchase return, they’re generally required to waive off the charges for that purchase. This is where a credit memo comes in handy.

• A credit memo is a document that’s dispatched by a supplier or seller to the buyer against a previously sent invoice
• The document is intended to ‘write off’ an amount to compensate for the defected item. The AP department can deduct the amount from the receipt and make the final payment
• In the case where payment has already been made, customers use the credit note to get refunds for future transactions from the company

How Are Invoices Different From Credit Memos?

These two documents serve different purposes. 

• Invoices are issued by vendors (suppliers) to collect payment for any services provided. A credit memo is issued to reduce or waive off the price of an item that doesn’t match the original order
• Bills of sales are issued by the vendor after the order is supplied. In most cases, there’s no need to follow up with a credit memo if the order and invoice match perfectly
• A credit memo or a credit note is only issued if a defected item is identified by the client and they wish to make the return

How Are The Two Documents Related?

Although different, credit memos and invoices are closely linked to one another.

• A credit note is a document that vendors attach to the sales receipt to make reconciliation for items that are returned
• Memos are related to a bill of sale because the complete or partial amount that the vendor waives for an item must be adjusted in the bill by the AP department
• When vendors create a credit note and attach it to a receipt, it’ll nullify or subtract the price of the items listed on that bill 

Who Should Use Credit Notes?

Whether you’re a freelancer, a small-sized company, or a moderately branching out enterprise, you must always have your transactions documented. There are numerous reasons for this.

• Large-scale businesses often prefer to keep their accounts in a documented format to avoid any future dispute, hence so should you
• Nullification of a receipt or the reduction of a price listed on a bill must always be recorded on a memo. Doing so informally can damage a company’s reputation and can lead to tax evasion charges
• Businesses generally prefer to issue a credit note instead of a refund for regular clients. This is mostly because issuing a memo demands less paperwork. For customers with pending purchases, the amount written off can always be adjusted in the next order

Conclusion

It’s quite easy to get caught up in the nitty-gritty of everyday business jargon. However, these terms serve as your free pass to uninterrupted cash flows. Knowing the difference between an invoice and a credit memo is a good place to start.