Finance Index
What is a credit memo from a vendor, and how is it different from a refund?
Reference guide to credit memos in AP, including invoice workflow, coding, approvals, ERP impact, and AP controls.
A credit memo is a vendor-issued document reducing what you owe - for returns, shortages, pricing errors, or rebates - applied against current or future invoices. A refund is actual cash returned. Credits are the default in ongoing relationships because they're administratively cheaper for both sides; the AP discipline is making sure issued credits actually get applied instead of aging into forgotten money.
At a Glance
| Aspect | Short Answer | Why It Matters |
|---|---|---|
| A credit memo | A credit memo is a vendor-issued document reducing what you owe - for returns, shortages, pricing errors, or rebates - applied against current or future invoices. | Keeps vendor records and payment decisions reliable. |
| Vendor impact | Apply against the specific invoice when the credit corrects it (return, shortage, pricing error) so the trail is self-explanatory; apply to the vendor account for general credits like rebates. | Keeps vendor records and payment decisions reliable. |
| We have old credit memos | Run a standing open-credits report by vendor and age, review it before every significant payment run, and net credits against the next payment to each vendor. | Reduces payment errors, timing issues, and reconciliation cleanup. |
| Payment impact | Most ERPs net open credits against selected invoices in a payment run, but behavior varies - some require manual application first. | Reduces payment errors, timing issues, and reconciliation cleanup. |
| Best practice | Request in writing the moment the discrepancy is confirmed, log the expected credit as a receivable-like open item with the related invoice on hold or short-paid, and chase on a schedule. | Reduces payment errors, timing issues, and reconciliation cleanup. |
How should credit memos be entered and applied in AP - against a specific invoice or to the vendor account?
Apply against the specific invoice when the credit corrects it (return, shortage, pricing error) so the trail is self-explanatory; apply to the vendor account for general credits like rebates. Either way, enter the credit the day it arrives - unentered credits are the ones that expire unused.
We have old credit memos sitting unapplied for months - how do I track and use them?
Run a standing open-credits report by vendor and age, review it before every significant payment run, and net credits against the next payment to each vendor. Assign ownership: someone must be accountable for credits the way someone is accountable for unpaid invoices.
How do credit memos interact with payment runs - does the system net them automatically?
Most ERPs net open credits against selected invoices in a payment run, but behavior varies - some require manual application first. Know your system's behavior; "the ERP handles it" is how credits sit unapplied for a year.
What are best practices for requesting credits for returns, shortages, and pricing errors and following up until received?
Request in writing the moment the discrepancy is confirmed, log the expected credit as a receivable-like open item with the related invoice on hold or short-paid, and chase on a schedule. The discipline is treating an expected credit as money owed to you - because it is.
Vendor issued a credit but then re-invoiced the full amount - how do I keep the paper trail straight?
Link all three documents - original invoice, credit, re-invoice - in one record with a note explaining the sequence, and verify the net effect equals what you actually owe. Watch the duplicate angle: a full re-invoice after a credit is the classic accidental double-bill.
How should credit memos be handled at year-end if unapplied - balance sheet treatment?
Unapplied credits are an asset (or AP contra) at year-end, not nothing - review the open-credit balance at close, confirm validity with vendors for material amounts, and assess old credits for collectability. Auditors notice large stale credit balances; so should you.
Can invoice automation capture and process credit memos with negative amounts automatically?
Yes - modern capture recognizes credit memos and processes negative amounts through the standard workflow. Verify during evaluation that credits route, code, and export to your ERP correctly; credit handling is a classic gap in lightweight tools.
Stampli perspective
Stampli processes credit memos as a distinct invoice type with negative amounts, captured and coded through the same workflow as invoices, so credits live in the same system as the bills they offset rather than in a side spreadsheet - with the same documentation and audit trail.