A credit memo is a document that a seller issues to the buyer reducing the amount the buyer owes to the seller. The memo explains the reason as to why. It could be issued instead of a refund. It could happen in the event of a pricing dispute or an allowance. It can be used to offset an invoice partially or to offset a future invoice.
Credit memo location: Contact/Job --> Financials tab ---> Credit Memos ---> Add Credit Memo.
If you have received an overpayment from a customer or they have returned a purchased item. You have a couple of options to return that money to the customer. You can create a credit memo or process a refund. You will have to decide which is the best route to take in the situation. The difference between a refund and a credit memo is that a customer immediately receives payment when there is a refund, whereas a credit memo is applied to customers balance.
Most customers who use credit memos first record the credit memo. Then later apply a payment and use the credit memo for payment.
If the customer would like a check or credit card return, then you would record a refund. This is done by either adding a line item labeled refund to an invoice and putting it in as a negative amount or creating a new invoice with a negative line item.
Quickbooks is better designed to record these transactions because you can choose which bank account or particular income account, so if you have Quickbooks you would want to create a refund receipt or credit memo there. Our sync with Quickbooks does support the basics of credit memos as well.
Settings in Quickbooks Online: QBO has a checkbox in settings that automatically apply credit memos. You can unclick the box to apply the credit to particular invoices manually. (Ellipsis icon---> Settings--->Advanced) To create a refund in Quickbooks click the plus sign ---> Refund receipt.
In Quickbooks desktop, you open the invoice, and on the top right there is a Refund/Credit area.
To create a credit memo under the actual invoice: