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Accounting for Credit Memos

Receivables lets you fully or partially credit your invoices while it automatically creates all the accounting reversal entries for you. You can use the Credit Transactions window or AutoInvoice to create your credit memos. The accounting is always the same whether the credit memo is imported through AutoInvoice or entered manually using the Credit Transactions window. Below are some examples of how Receivables accounts for credit memos.

Sample Invoice #102

On 1/1/XX the following invoice is created:

Details: Invoice Number = 02

Invoice Date = 1/1/XX

Invoice Amount = $100

Duration = 5 months

Invoicing Rule = Bill In Advance

Accounting Rule = Fixed Amount as follows:

Period 1 = $20

Period 2 = $20

Period 3 = $10

Period 4 = $30

Period 5 = $20

Accounting Entries:

GL Date and Period Status:

1/1/XX DR Accounts Receivable $100
Open CR Unearned Revenue $100
DR Unearned Revenue $20  
CR Revenue $20
2/1/XX DR Unearned Revenue $20  
Not Opened CR Revenue $20
3/1/XX DR Unearned Revenue $10
Not Opened CR Revenue $10
4/1/XX DR Unearned Revenue $30
Not Opened CR Revenue $30
5/1/XX DR Unearned Revenue $20
Not Opened CR Revenue $20

Case 1

A full credit memo is entered on 2/15/XX against invoice #102.

Details: Credit memo date = 2/15/XX

Credit memo amount = $100

Accounting Entries:

GL Date and Period Status:

1/1/XX No Entries

Open

2/15/XX DR Unearned Revenue $100
Open CR Accounts Receivable $100

(to reverse the original receivable)

DR Revenue $20
CR Unearned Revenue $20

(to reverse Period 1 accounting entry)

DR Revenue $20
CR Unearned Revenue $20

(to reverse Period 2 accounting entry)

3/1/XX DR Revenue $10
Not Opened CR Unearned Revenue $10

(to reverse Period 3 accounting entry)

4/1/XX DR Revenue $30
Not Opened CR Unearned Revenue $30

(to reverse Period 4 accounting entry)

5/1/XX DR Revenue $20
Not Opened CR Unearned Revenue $20

(to reverse Period 5 accounting entry)

Case 2

A partial credit memo is entered on 2/15/XX against invoice #102, with credit method for rules set to prorate.

Details: Credit Memo Date = 2/15/XX

Credit Memo Amount = $65

Accounting Entries:

GL Date and Period Status:

1/1/XX No Entries

Open

2/15/XX DR Unearned Revenue (65/100*$100) $65
Open CR Accounts Receivable $65

(to partially reverse original receivable)

DR Revenue (65/100*$20) $13
CR Unearned Revenue $13

(to partially reverse Period 1 accounting entry)

DR Revenue (65/100*$20) $13
CR Unearned Revenue $13

(to partially reverse Period 2 accounting entry)

3/1/XX DR Revenue (65/100*$10) $6.50
Open CR Unearned Revenue $6.50

(to partially reverse Period 3 accounting entry)

4/1/XX DR Revenue (65/100*$30) $19.50
Not Opened CR Unearned Revenue $19.50

(to partially reverse Period 4 accounting entry)

5/1/XX DR Revenue (65/100*$20) $13
Not Opened CR Unearned Revenue $13

(to partially reverse Period 5 accounting entry)

Case 3

A partial credit memo is entered on 2/15/XX against invoice #102, with credit method for rules set to LIFO.

Details: Credit Memo Date = 2/15/XX

Credit Memo Amount = $65

Accounting Entries:

GL Date and Period Status:

1/1/XX No Entries

Open

(credit memo amount is fully applied by Period 2)

2/15/XX DR Revenue $5
Open CR Unearned Revenue $5

(to partially reverse Period 2 accounting entry*)

* The amount is computed as follows:

*A *B *C *D

Formula = $5 = $65 - $20 - $30 - $10

DR Unearned Revenue $65
CR Accounts Receivable $65

(to partially reverse original receivable)

* 
A = Credit Memo Amount 
B  = Period 5 Revenue Amount 
C = Period 4 Revenue Amount 
D = Period 3 Revenue Amount

3/1/XX DR Revenue $10
Open CR Unearned Revenue $10

(to fully reverse Period 3 accounting entry)

4/1/XX DR Revenue $30
Not Opened CR Unearned Revenue $30

(to fully reverse Period 4 accounting entry)

5/1/XX DR Revenue $20
Not Opened CR Unearned Revenue $20

Case 4

A partial credit memo is entered on 6/1/XX for 8 units with an amount of $65 against invoice #102, assuming that this invoice consists of 10 units with a value of $10 each for a total of $100. This credit memo is entered with credit method for rules set to UNIT.

Details: Credit Memo Date = 6/1/XX

Credit Memo Amount = $65

Accounting Entries:

GL Date:

Formula = Net Unit Price = Invoice Amount in this period - any previous credit memos in this period / Original invoice quantity Amount to Credit in this period = Net Unit Price for period * Units to Credit

Formula = Net Unit Price per period =
Period 5 = $20-$0/10units = $2
Period 4 = $30-$0/10units = $3
Period 3 = $10-$0/10units = $1
Period 2 = $20-$0/10units = $2
Period 1 = $20-$0/10units = $2

Formula = Amount to Credit this period =

Period 5 = $2 * 8units = $16 $65-$16 = $49

Period 4 = $3 * 8units = $24 $49-$24 = $25

Period 3 = $1 * 8units = $8 $25-$8 = $17

Period 2 = $2 * 8units = $16 $17-$16 = $1

Period 1 = $2 * 8units = $16 $1-$16 = - $15

--- ---

Total $80 $65

1/1/XX DR Unearned Revenue $65
Open CR Accounts Receivable $65

(to partially reverse original receivable)

DR Revenue $1
CR Unearned Revenue $1
2/1/XX DR Revenue $16
Open CR Unearned Revenue $16

(to partially reverse Period 2 accounting entry)

3/1/XX DR Revenue $8
Open CR Unearned Revenue $8

(to partially reverse Period 3 accounting entry)

4/1/XX DR Revenue $24
Open CR Unearned Receivable $24

(to partially reverse Period 4 accounting entry)

5/1/XX DR Revenue $16
Open CR Unearned Receivable $16

(to partially reverse Period 5 accounting entry)

Sample Invoice #103

On 1/1/XX the following invoice is created.

Details: Invoice Number = 103

Invoice Date = 5/1/XX

Invoice Amount = $100

Duration = 5 months

Invoicing Rule = Bill In Arrears

Accounting Rule = Fixed Amount as follows:

Period 1 = $20

Period 2 = $20

Period 3 = $10

Period 4 = $30

Period 5 = $20

Accounting Entries:

GL Date:

1/1/XX DR Unbilled Receivable $20
Open CR Revenue $20
2/1/XX DR Unbilled Receivable $20
Not Opened CR Revenue $20
3/1/XX DR Unbilled Receivable $10  
Not Opened CR Revenue $10
4/1/XX DR Unbilled Receivable $30  
Not Opened CR Revenue $30
5/1/XX DR Accounts Receivable $100  
Not Opened CR Unbilled Receivable $100
DR Unbilled Receivable $20  
CR Revenue $20

Case 1

Details: Credit Memo Date = 6/1/XX

Credit Memo Amount = $100

Accounting Entries:

GL Date:

1/1/XX Closed No Entries
2/1/XX Closed No Entries
3/1/XX Closed No Entries

4/1/XX DR Revenue $20
Open CR Unbilled Receivable $20

(to reverse Period 1 accounting entry)

DR Revenue $20
CR Unbilled Receivable $20

(to reverse Period 2 accounting entry)

DR Revenue $10
CR Unbilled Receivable $10

(to reverse Period 3 accounting entry)

DR Revenue $30
CR Unbilled Receivable $30

(to reverse Period 4 accounting entry)

5/1/XX DR Revenue $20
Open CR Unbilled Receivable $20

(to reverse Period 5 accounting entry)

6/1/XX DR Unbilled Receivable $100
Open CR Accounts Receivable $100

(to reverse the original receivable)

4/1/XX DR Revenue $20
Open CR Unbilled Receivable $20

(to reverse Period 1 accounting entry)

DR Revenue $20
CR Unbilled Receivable $20

(to reverse Period 2 accounting entry)

DR Revenue $10
CR Unbilled Receivable $10

(to reverse Period 3 accounting entry)

DR Revenue $30
CR Unbilled Receivable $30

(to reverse Period 4 accounting entry)

5/1/XX DR Revenue $20
Open CR Unbilled Receivable $20

(to reverse Period 5 accounting entry)

6/1/XX DR Unbilled Receivable $100
Open CR Accounts Receivable $100

(to reverse the original receivable)

Case 2

A partial credit memo is entered on 6/1/XX against invoice #103. This credit memo is entered with credit method for rules set to prorate.

Details: Credit Memo Date = 6/1/XX

Credit Memo Amount = $65

Accounting Entries:

GL Date:

1/1/XX No Entries

Closed

2/1/XX No Entries

Closed

3/1/XX No Entries

Closed

4/1/XX DR Revenue (65/100*$20) $13
Open CR Unbilled Receivable $13

(to partially reverse Period 1 accounting entry)

DR Revenue (65/100*$20) $13
CR Unbilled Receivable $13

(to partially reverse Period 2 accounting entry)

DR Revenue (65/100*$10) $6.50
CR Unbilled Receivable $6.50

(to partially reverse Period 3 accounting entry)

DR Revenue (65/100*$30) $19.50
CR Unbilled Receivable $19.50

(to partially reverse Period 4 accounting entry)

5/1/XX DR Revenue (65/100*$20) $13
Open CR Unbilled Receivable $13

(to partially reverse Period 5 accounting entry)

6/1/XX DR Unbilled Receivable $65
Open CR Accounts Receivable $65

(to partially reverse the original receivable)

Case 3

A partial credit memo is entered on 6/1/XX for $65 against invoice #103. This credit memo is entered with credit method for rules set to LIFO.

Details: Credit Memo Date = 6/1/XX Credit Memo Amount = $65

Accounting Entries:

GL Date:

1/1/XX No Entries
Closed

2/1/XX No Entries
Closed
3/1/XX No Entries
Closed

4/1/XX DR Revenue $5
Open CR Unbilled Receivable $5

(to partially reverse Period 2 accounting entry*)

* The amount is computed as follows:

  *A *B *C *D

  Formula = $5 = $65 - $20 - $30 - $10

DR Revenue $10
CR Unbilled Receivable $10

(to fully reverse Period 3 accounting entry)

DR Revenue $30
CR Unbilled Receivable $30

(to fully reverse Period 4 accounting entry)

5/1/XX DR Revenue $20
Open CR Unbilled Receivable $20

(to reverse Period 5 accounting entry)

6/1/XX DR Unbilled Receivable $65
Open CR Accounts Receivable $65

(to partially reverse the original receivable)

*			A = Credit Memo Amount 
			B = Period 5 Revenue Amount 
			C = Period 4 Revenue Amount 
			D = Period 3 Revenue Amount

Case 4

A partial credit memo is entered on 6/1/XX for 8 units with an amount of $40 against invoice #103, assuming that this invoice consists of 10 units with a value of $10 each for a total of $100. This credit memo is entered with credit method for rules set to UNIT and the Last Period to Credit set for the last period of the invoice.

Details: Credit Memo Date = 6/1/XX

Credit Memo Amount = $65

Accounting Entries:

GL Date:

Formula = Net Unit Price = Invoice Amount in this period - any previous credit memos in this period / Original invoice quantity

Amount to Credit in this period = Net Unit Price for period * Units to Credit

Formula = Net Unit Price per period =
Period 5 = $20-$0/10units = $2
Period 4 = $30-$0/10units = $3
Period 3 = $10-$0/10units = $1
Period 2 = $20-$0/10units = $2
Period 1 = $20-$0/10units = $2
Formula = Amount to Credit this period =
Period 5 = $2 * 8units = $16
Period 4 = $3 * 8units = $24
----
Total $40

1/1/XX No Entries
Closed
2/1/XX No Entries
Closed
3/1/XX No Entries
Closed

4/1/XX DR Revenue $24
Open CR Unbilled Receivable $24

(to partially reverse Period 3 accounting entry)

5/1/XX DR Revenue $16
Open CR Unbilled Receivable $16
6/1/XX DR Unbilled Receivable $40
Open CR Accounts Receivable $40

(to partially reverse the original receivable)

Sample Invoice #104

On 1/1/XX the following invoice is created.

Details: Invoice Number = 104

Invoice Date = 1/1/XX

Invoice Amount = $100

Payment Terms = 3 Installments as follows:

Due Date Amount

2/1/XX $50

3/1/XX $25

4/1/XX $25

The payment schedules for these installments will be as follows:

Due Date Original Amt. Due Remaining Amt. Due Amount # Credited
2/1/XX $ 50 $ 50 $0
3/1/XX $ 25 $ 25 $0
4/1/XX $ 25 $ 25 $0
____ ____ ____
Total $100 $100 $0

Case 1

Step 1.

On 1/1/XX a credit memo is entered against invoice #104. The credit method for split terms is set to Prorate for this example.

Details: Credit Memo Date = 1/1/XX

Credit Memo Amount = $45

To calculate the amount credited per payment schedule, Receivables uses the following formula:

Amount Credited = (Credit Memo Amount/Total Remaining Amount Due) * Amount Due Remaining on this installment

e.g. 45/100 * 50 = 22.50

This credit memo has the following affect on the payment schedules of invoice #104:

Due Date Original Amt. Due Remaining
Amt. Due 		Amount Credited
2/1/XX $ 50 $27.50 $22.50
3/1/XX $ 25 $13.75 $11.25
4/1/XX $ 25 $13.75 $11.25
______ ______ ______
Total $100 $55.00 $45.00

Step 2.

On 1/15/XX a payment is received for $20 which has the following affect on the payment schedules of invoice #104:

Due Date Original Amt. Due Remaining Amt. Due Amount Credited Payment Applied
2/1/XX $ 50 $ 7.50 $22.50 $20
3/1/XX $ 25 $13.75 $11.25 $ 0
4/1/XX $ 25 $13.75 $11.25 $ 0
______ ______ ______ ______
Total $100 $35.00 $45.00 $20

Step 3.

On 1/16/XX another credit memo is entered against invoice #104:

Details Credit Memo Date = 1/16/XX

Credit Memo Amount = $20

This credit memo has the following affect on the payment schedules of invoice #104:

Due Date Original Amt. Due Remaining Amt. Due Amount Credited Payment Applied
2/1/XX $ 50 $ 3.22 $26.78** $20
3/1/XX $ 25 $ 5.89 $19.11 $ 0
4/1/XX $ 25 $ 5.89 $19.11 $ 0
______ ______ ______ ______
Total $100 $15.00 $65.00 $20

** 22.50+(20/35*7.50) = 26.78 (rounded to two decimal places)

Case 2

Step 1.

On 1/1/XX a credit memo is entered against invoice #104. The credit method for split terms is set to LIFO for this example.

Details: Credit Memo Date = 1/1/XX

Credit Memo Amount = $45

This credit memo has the following affect on the payment schedules of invoice #104.

Due Date Original Amt. Due Remaining Amt. Due Amount Credited
2/1/XX $50 $50 $0
3/1/XX $25 $5 $20
4/1/XX $25 $0 $25
______ ______ ______
Total $100 $55.00 $45.00

Step 2.

On 1/15/XX a payment is received for $20 which has the following affect on the payment schedules of invoice #104:

Due Date Original Amt. Due Remaining Amt. Due Amount Credited Payment Applied
2/1/XX $50 $30 $0 $20
3/1/XX $25 $5 $20 $ 0
4/1/XX $25 $0 $25 $ 0
______ ______ ______ ______
Total $100 $35 $45 $20

Step 3.

On 1/16/XX another credit memo is entered against invoice #104.

Details Credit Memo Date = 1/16/XX

Credit Memo Amount = $20

This credit memo has the following affect on the payment schedules of invoice #104:

Due Date Original Amt. Due Remaining Amt. Due Amount Credited Payment Applied
2/1/XX $50 $15 $15 $20
3/1/XX $25 $0 $25 $ 0
4/1/XX $25 $0 $25 $ 0
______ ______ ______ ______
Total $100 $15 $65 $20

Case 3

Step 1.

On 1/1/XX a credit memo is entered against invoice #104. The credit method for split terms is set to FIFO for this example.

Details: Credit Memo Date = 1/1/XX

Credit Memo Amount = $45

This credit memo has the following affect on the payment schedules of invoice #104.

Due Date Original Amt. Due Remaining Amt. Due Amount Credited
2/1/XX $50 $5 $45
3/1/XX $25 $25 $0
4/1/XX $25 $25 $0
______ ______ ______
Total $100 $55.00 $45.00

Step 2.

On 1/15/XX a payment is received for $20 which has the following affect on the payment schedules of invoice #104:

Due Date Original Amt. Due Remaining Amt. Due Amount Credited Payment Applied
2/1/XX $50 $0 $45 $5
3/1/XX $25 $10 $0 $15
4/1/XX $25 $25 $0 $ 0
______ ______ ______ ______

Total $100 $35 $45 $20

When the payment applied on 1/15/XX fully covered the amount due for the first pay period, the remainder of the payment is applied to the amount due for the following period.

Step 3.

On 1/16/XX another credit memo is entered against invoice #104.

Details Credit Memo Date = 1/16/XX

Credit Memo Amount = $20

This credit memo has the following affect on the payment schedules of invoice #104:

Due Date Original Amt. Due Remaining Amt. Due Amount Credited Payment Applied
2/1/XX $50 $0 $45 $5
3/1/XX $25 $0 $10 $15
4/1/XX $25 $15 $10 $ 0
______ ______ ______ ______
Total $100 $15 $65 $20

Credit Memos Against Invoices Against Commitments

Below are some examples that show the accounting entries that are created when you credit invoices against commitments.

A Full Credit Memo Against an Invoice Against a Deposit

1. A deposit is entered for $1000. The accounting entry is:

DR Accounts Receivable (Deposit) $1000

CR Revenue $1000

2. An invoice for $400 is entered against this deposit. The accounting entries are:

DR Accounts Receivable (Invoice) $400

CR Revenue $400

Receivables automatically creates a receivables adjustment for the invoiced amount. This adjustment is created against the invoice resulting in an amount due in Accounts Receivable of $0. (Note: In our example, the $400 below does not include tax and freight). Therefore, there is no balance due for the $400 invoice, as it has drawn against their $1000 deposit in lieu of payment of the invoice.

DR Revenue $400

CR Accounts Receivable (Invoice) $400

3. A credit memo for $400 is applied to the $400 invoice. The accounting entries are:

DR Accounts Receivable (Invoice) $400

CR Revenue $400

(This accounting entry reverses the adjustment entered in the previous step.)

DR Revenue $400

CR Accounts Receivable (Invoice) $400

(This accounting entry reverses the invoice entered in the previous step, leaving a deposit balance of $600.)

A Full Credit Memo Against an Invoice Against a Guarantee

1. A guarantee is entered for $1000. The accounting entry is:

DR Unbilled Receivables $1000

CR Unearned Revenue $1000

2. An invoice for $400 is entered against this guarantee. The accounting entries are:

DR Accounts Receivable $400

CR Revenue $400

Receivables automatically creates a receivables adjustment for the invoiced amount. This adjustment is created against the guarantee. Therefore, an outstanding amount of $400 exists for this invoice and the guarantee has an outstanding balance of $600.

DR Unearned Revenue $400

CR Unbilled Receivable $400

3. A credit memo for $400 is applied to the $400 invoice. The accounting entries are:

DR Unbilled Receivables $400

CR Unearned Revenue $400

(This accounting entry reverses the adjustment entered in the previous step.)

DR Revenue $400

CR Accounts Receivable $400

(This accounting entry reverses the invoice entered in the previous step.)

Special Cases - A Credit Memo Against an Invoice Against a Deposit

This case shows the accounting entries that are created when you apply an invoice to a deposit and the invoice amount is greater than the deposit. It also shows the entries that are created when you apply a partial credit memo to the invoice.

1. A deposit is entered for $100. The accounting entry is:

DR Accounts Receivable (Deposit) $100

CR Revenue $100

2. An invoice for $220 is entered against this deposit. The accounting entries are:

DR Accounts Receivable (Invoice) $220

CR Revenue $220

DR Revenue $100

CR Accounts Receivable (Invoice) $100

(The current outstanding balance for the invoice is $120)

3. A credit memo for $150 is applied to the invoice. The accounting entries are:

Receivables automatically creates a receivables adjustment for $30 against the invoice to increase the outstanding balance to $150.

DR Accounts Receivable (Invoice) $30

CR Revenue $30

DR Revenue $150

CR Accounts Receivable (Invoice) $150

(This accounting entry is for the $150 credit memo leaving a deposit balance of $30.)

Special Cases - A Credit Memo Against an Invoice Against a Guarantee

This case shows the accounting entries that are created when you apply an invoice to a guarantee and the invoice amount is greater than the guarantee. It also shows the entries that are created when you apply a partial credit memo to the invoice.

1. A guarantee is entered for $100. The accounting entry is:

DR Unbilled Receivable $100

CR Unearned Revenue $100

2. An invoice for $220 is entered against this guarantee. The accounting entries are:

DR Accounts Receivable $220

CR Revenue $220

DR Unearned Revenue $100

CR Unbilled Receivable $100

(The current outstanding balance for the invoice remains at $220)

3. A credit memo for $150 is applied to the invoice. The accounting entries are:

DR Revenue $150

CR Accounts Receivable (Invoice) $150

(The current outstanding balance for the invoice is $70)

Receivables automatically creates a receivables adjustment for $30 against the guarantee to increase the outstanding balance to $30.

DR Unearned Revenue $30

CR Unbilled Receivable $30

See Also

Crediting Transactions

Transactions

Credit Memos

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