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Credit Memos
During financial transactions, you might need to provide credit to the customers for accommodating situations where goods are returned, there is a pricing dispute or where the buyer is not required to pay the full amount of the invoice. In such cases, you can issue a Credit Memo to store the credit balance and offset it against a transaction.
A Credit Memo is a legal document that states the credit balance. The Credit Memos can be issued to counterbalance current invoices or apply to future invoices.
Note
You can create a Credit Memo only when you have already invoiced your customer. Also when issuing a credit memo against an invoice, you must ensure that you issue it for the same amount or amount lower than the total amount of all the invoices in the billing schedule for an asset.
Let us take a couple of scenarios to understand the concept of Credit Memos.
Scenario 1: The credit amount is less than or equal to the invoiced amount
If the credit amount is less than the invoiced amount, the credit is calculated from the same invoice.
For example, your customer purchased a product 'CloudStream' with a base price $100 for 6 months. Therefore each Billing Schedule would carry an amount of $100 spread across 6 months. You've invoiced the customer for $600 in advance.
Now due to a price downgrade ($10) effective from the 3rd month you have to amend the product price. Post-amendment, the existing Billing Schedules are revised to $90 from 3rd month onward. On comparing the old and new Billing Schedules, you can deduce that $40 needs to be credited back to the customer's account for the last 4 months owing to the downgrade. So you must issue a Credit Memo document which has a total amount of $40.
Scenario 2: The credit amount is greater than the invoiced amount
If the credit amount exceeds the invoiced amount for which it was credited, the maximum possible amount is credited from the corresponding invoice. The remaining amount is credited from all the invoices in the billing schedule, starting from the first invoice.
For example, your customer purchased a product 'CloudStream' with a base price $100 for 3 months. Therefore each Billing Schedule would carry an amount of $100 spread across 3 months. You've invoiced the customer for $300 in advance. Now, let’s assume that for the billing schedule BS1, a direct credit memo of $65 was created and for the billing schedule BS2, a direct credit memo of $80 was created. After credit memos are generated and approved, the amount remaining in BS1 is $35 and in BS2 is $20.
| Billing Schedule | Start Date | End Date | Fee Amount | Status | Is Superseded? | Debit Schedule | Available Credit |
|---|---|---|---|---|---|---|---|
| BS1 | 3/1/2017 | 3/31/2017 | 100.00 | Invoiced | 35.00 | ||
| BS2 | 4/1/2017 | 4/30/2017 | 100.00 | Invoiced | 20.00 | ||
| BS3 | 5/1/2017 | 5/31/2017 | 100.00 | Invoiced | 100.00 |
Now if you amend the contract and reduce the rate of the asset to $70 per month, you will have to provide your customer with a $30 credit for each billing schedules. After the contract is amended and the renewed quote/proposal is accepted, a new order is created. Once the order is activated, new billing schedules are generated as mentioned in the following table:
| Billing Schedule | Start Date | End Date | Fee Amount | Status | Is Superseded? | Debit Schedule | Available Credit |
|---|---|---|---|---|---|---|---|
| BS1 | 3/1/2017 | 3/31/2017 | 100.00 | Invoiced | Yes | 0.00 | |
| BS4 | 3/1/2017 | 3/31/2017 | -30.00 | Pending Billing | BS1 | ||
| BS2 | 4/1/2017 | 4/30/2017 | 100.00 | Invoiced | Yes | 0.00 | |
| BS5 | 4/1/2017 | 4/30/2017 | -20.00 | Pending Billing | BS2 | ||
| BS6 | 4/1/2017 | 4/30/2017 | -5.00 | Pending Billing | BS1 | ||
| BS7 | 4/1/2017 | 4/30/2017 | -5.00 | Pending Billing | BS3 | ||
| BS3 | 5/1/2017 | 5/31/2017 | 100.00 | Invoiced | Yes | 65.00 | |
| BS8 | 5/1/2017 | 5/31/2017 | -30.00 | Pending Billing | BS3 |
You need to invoice the billing schedules, for the credit memos to get generated.
For BS4, $30 credit is calculated from BS1 which had $35 amount. For BS5, only $20 credit is calculated from BS2 as only $20 is available in this billing schedule. For the remaining $10, the system starts calculating from the first billing schedule, which is BS1. As BS1 has only $5 left, a billing schedule BS6 is created with an amount of $5 with BS1 as the debit schedule. The remaining $5 credit is calculated from BS3. For BS8, $30 credit is calculated from BS3.
There are two ways of generating a Credit Memo:
- From an Invoice
- Through Invoice Runs