A credit memo is a document a seller issues to reduce what a customer owes. It is used after a return, a discount agreed after the sale, or a billing error. No money changes hands. The credit is applied against an open invoice, kept on the account for a future invoice, or paid back as a refund. In QuickBooks Online, a credit memo reduces the customer's open balance and affects sales reports even before it is applied. With auto-apply on, QuickBooks applies it to the oldest unpaid invoice.
What is a credit memo?
A credit memo, short for credit memorandum, is a record that the customer owes you less than you billed. It is the opposite of an invoice. An invoice adds to the customer's balance. A credit memo takes away from it.
QuickBooks describes the purpose plainly: "Send customers credit memos to reduce how much they owe you after a return, discount, or billing error."
When do you issue one?
- A return. The customer sends back goods or cancels part of a service.
- A discount after the fact. You agree to take an amount off an invoice already sent.
- A billing error. The invoice charged the wrong price or the wrong quantity.
- A write-off. QuickBooks also notes you might apply a credit memo "to write off the balance of an invoice you'll never receive, like bad debt."
How does a credit memo work? A worked example
A customer is on a $14,800 plan: a $1,500 deposit, 11 payments of $1,108.33 and a last payment of $1,108.37. They return a $300 kit that was part of the price.
| Step | Amount |
|---|---|
| Original total | $14,800.00 |
| Credit memo for the returned kit | −$300.00 |
| New total | $14,500.00 |
The credit memo is the record of the $300. Whether it comes off the next payment, is spread over the remaining payments or is refunded is a separate decision, and the customer should know which.
What is the difference between a credit memo and a refund?
A credit memo changes what is owed. A refund sends money back. If the customer still has open invoices, the credit usually reduces them. If they have paid everything, the credit leaves a balance in their favor, and a refund settles it.
How does QuickBooks Online record a credit memo?
From the QuickBooks Online support article:
- Credit memo or delayed credit. "If your customer wants to immediately reduce their current open balance, use a credit memo." A delayed credit tracks a credit for future use and is added to a later invoice.
- Sales reports. "Credit memos impact sales reports, even if you don't apply them to invoices." Delayed credits don't affect sales reports until they're applied.
- Applying it. You apply a credit memo through Receive payment: choose the customer, the invoice and the credit, and enter the amount to apply.
- Auto-apply. With Automatically apply credits turned on, QuickBooks applies the credit to the oldest unpaid invoice, then the next, until it is used up.
- Nothing to apply it to. If there are no unpaid invoices, the credit memo's status is Unapplied and the customer's balance is negative.
Does a credit memo need the customer's signature?
No. It is your record of what you no longer expect to be paid. Send a copy to the customer so their records match yours, and so they can see how the credit was applied.
Every figure on this page was checked against these sources on Oct 6, 2026. General information, not legal or tax advice.