What are Credit Memos used for?

A Credit Memo is a document that a seller issues to the buyer, reducing the amount the buyer owes to the seller; this could be used in place of a refund, whether in the event of a pricing dispute or an allowance, for example.  It can be used to partially offset an invoice or to offset a future invoice's total amount due.

Most businesses first record the issuing of the Credit Memo and then apply a payment to an invoice, including the credit in 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.