How to Cancel an Invoice with a Credit Memo
At some point, a business owner might need to change or cancel an invoice. Whether it’s due to incorrect customer information, a forgotten discount, or a refund, the cancelled invoice must be accurately recorded for your records.
Since invoices are legally binding documents, canceling them must be done correctly by issuing a credit memo. A credit memo, also known as a credit note, is a document that’s issued from a business to a customer to cancel all or part of a sale. It’s also used to document a refund.
This article describes the cases you’ll need to issue a credit memo, what details need to be on them, and how to create them.
Credit memos are usually linked to an invoice, but they don’t need to be if the credit memo does not relate to a specific sale. A credit memo has a few different functions, including:
To document a refund
To cancel an invoice due to incorrect invoice information
To cancel all or part of an invoice before payment is made
Any time you return money to a customer or cancel either all or part of a sale, a credit memo should be issued. It’s beneficial for both your business for accounting purposes, and the customer to ensure that the sale has been cancelled or a refund has been issued.
Credit memos follow a similar format to invoices, but they serve an entirely different function. While invoices are a request for payment, a credit memo indicates a cancelation or return of funds to the client.
Credit memos are financial documents that require certain information in order to be valid. As a general rule, they should include the same details that you’d find on an invoice, plus a few additional details to specify the credit. Credit memos should include the following:
The label 'Credit Memo' or 'Credit Note'
You and your clients’ full name and address
A unique credit memo number
The credit memo date
The original invoice number and issue date (if applicable)
The reason for the credit
The total amount being cancelled/refunded
Below, you'll find a sample credit memo created with SumUp Invoices. The software ensures that the mandatory fields are input before you send it to your customer.
If a customer accidentally overpaid an invoice or returned a product for a refund, you should issue a credit memo to document the returned funds. In the case that a customer returns products from an existing sale, the credit memo should be linked to the original invoice and the refund transaction should be linked to the credit memo.
On the other hand, if a customer overpays an invoice and you are just refunding the difference, the credit memo should not be linked to the invoice because the invoice is already paid in full. In this case, a standalone credit memo should be issued separate from the original invoice, and the refund transaction should be linked to the standalone credit memo.
An alternative method is to keep the funds that would have been returned to the customer. Instead, offer the customer a credit towards future purchases. However, this needs to be agreed upon by both parties, or included in your Terms & Conditions.
Everyone accidentally makes mistakes, and every business at one point or another will make a mistake on an invoice.
If you incorrectly type your customer’s details and send it to your customer, you should issue a credit memo to cancel the entire invoice. Then, you should create and issue an entirely new invoice with the correct information.
If you accidentally entered a product or service that shouldn’t have been included in the sale, you can simply issue a credit memo for the one product or service. This cancels the one item line rather than the entire invoice, so there’s no need to create a brand new invoice.
Credit memos should be issued in the case that a customer backs out of the sale before issuing a payment. They can also be issued if your business cannot supply the goods or services included in the invoice. In these cases, you can issue a credit memo to cancel what is owed, and the credit memo lets the customer know that the invoice has been canceled.
Just like invoices, there are many ways that you can create a credit memo. Below, we listed the advantages and disadvantages of each type of credit memo you can create:
Some businesses prefer to write credit memos by hand and send them in the mail to their customers. This can be a time-consuming process and there’s a possibility that the credit memo could get lost in the mail. You may also need to pay extra fees for postage.
While this was the original process of sending documents, there are now better ways with everything moving online. If you prefer to write the credit memo by hand, then you’ll need to ensure that each document is compliant and contains a unique credit memo number.
Word is a software that almost everyone knows how to use. It’s commonly used to create invoices and credit memos, but while it’s a simple document creating software, it wasn’t specifically designed for creating financial documents. Therefore, you’ll still need to manually add up the totals and check that the required information is input correctly.
If Word is your software of choice for creating invoices and credit memos, you can download our free invoice templates for Word and Excel.
Compared to Word, Excel is much more adapted to automating your invoices and credit memos. With the use of Excel formulas, you can create a template that automatically adds up the totals and creates a new credit memo number for each document. However, you’ll still need to manually input your customers information.
Another way you can create credit memos for your business is with invoicing software. Invoicing software is designed specifically for invoicing and accounting documents, making it much simpler than the alternatives.
With SumUp Invoices, you can create and send a credit memo in less than a minute. Since you can import a list of your customers and products, you can quickly select them from the credit memo edit page, and the system will auto-fill the details.
SumUp Invoices ensures that your credit memos are compliant under your local regulations. You can also easily select the correct sales tax rate if required. Your payments are automatically added to your SumUp Dashboard, so you can easily reconcile your invoices and credit memos with your SumUp transactions.