To create a credit memo in QuickBooks Online, select the “+ New” (or “+ Create”) button, then choose “Credit memo” from the menu. From there, you fill in the customer name, the products or services being credited, and the amount. The whole process takes about a minute, but how you apply that credit afterward matters just as much as creating it.
Creating the Credit Memo
Start by clicking the + New button (also labeled “+ Create” in some versions) in the left-hand navigation panel. Under the Customers column, select Credit memo. This opens a form that looks similar to an invoice, but in reverse.
Fill in the following fields:
- Customer: Select the customer from the dropdown. If you pick a customer with an existing open invoice, QuickBooks links the two records together in that customer’s account.
- Credit memo date: This defaults to today’s date. Change it if the credit applies to a prior period.
- Product/Service: Choose the item you’re issuing credit for. This should match what appeared on the original invoice so your income accounts stay accurate.
- Amount: Enter the dollar amount of the credit. You can credit a partial amount or the full invoice total.
- Message on credit memo: Optional, but useful if you want the customer to see a brief explanation when you email or print it.
Once everything looks right, click Save and close (or Save and send if you want to email the credit memo directly to the customer). QuickBooks records the credit memo as a reduction in that customer’s balance.
When to Use a Credit Memo Instead of a Refund
A credit memo reduces what a customer owes you on a current or future invoice. No money leaves your bank account. Use one when a customer was overcharged, returned part of an order, or received a pricing adjustment they’ll apply to their next purchase.
A refund receipt is different. It records money going back to the customer, either to their credit card, check, or bank account. If the customer has already paid and wants their money back rather than a future credit, a refund receipt is the right transaction. Credit memos can only be applied to open invoices or future ones. They don’t trigger any cash movement on their own.
Applying a Credit Memo to an Invoice
Creating the credit memo is only half the job. You also need to apply it to an open invoice so the customer’s balance updates correctly. QuickBooks gives you two ways to handle this: automatically or manually.
Automatic Application
QuickBooks Online has a setting that automatically applies credit memos to a customer’s oldest open invoice. To check whether it’s on, go to Settings (the gear icon), then Account and settings, then the Advanced tab. Look for the “Automatically apply credits” option. When this is turned on, any new credit memo you create will immediately reduce the matching customer’s outstanding balance without extra steps. When it’s turned off, existing invoices won’t be credited until you manually link them.
Manual Application
If you prefer to control which invoice gets the credit, or if auto-apply is turned off, follow these steps:
- Select + New, then choose Receive payment.
- From the Customer dropdown, select the customer who has the credit memo.
- In the Outstanding Transactions section, check the box next to the invoice you want to apply the credit to.
- In the Credits section below, check the credit memo(s) you want to use.
- In the Payment column next to the invoice, enter how much of the credit you want to apply. This can be the full credit amount or just a portion.
- Leave the Payment method, Reference no., Deposit to, and Amount received fields blank. You’re not recording an actual payment here, just linking the credit.
- Set the Payment date and verify the totals look correct.
- Click Save and close.
After you save, QuickBooks reduces the invoice balance by the credited amount. If the credit memo fully covers the invoice, that invoice will show as paid.
How Credit Memos Affect Your Books
When you create a credit memo, QuickBooks posts a negative amount to the income account tied to the product or service line you selected. This effectively reverses part (or all) of the revenue you originally recorded on the invoice. Your accounts receivable balance for that customer also drops by the credit amount.
If the credit memo involves inventory items, QuickBooks adjusts your inventory quantity back up, assuming the customer is returning goods. Make sure the item field on the credit memo matches the original product so the stock count stays accurate.
For sales tax, the credit memo reduces taxable sales for the period in which you issue it. When you run your sales tax liability report, the credited amount will appear as a deduction, lowering what you owe.
Handling Partial Credits
You don’t have to credit the full invoice amount. If a customer ordered five items and returned two, create a credit memo for just the two returned items. When you apply it manually using the Receive Payment screen, enter only the partial credit in the Payment column. The invoice will show a reduced balance rather than being marked fully paid.
You can also split a single credit memo across multiple invoices. On the Receive Payment screen, check more than one invoice in the Outstanding Transactions section, then allocate portions of the credit to each one. Just make sure the amounts you enter add up to the total credit memo value (or less, if you want to leave some credit on the account for later).
Sending the Credit Memo to Your Customer
If you chose “Save and close” when you created the credit memo but later decide to send it, navigate to Sales, then All Sales (or Invoices depending on your version). Filter or search for the credit memo by customer name or memo number. Open it and select Send to email a copy. The email uses whatever template you’ve set up for credit memos under your custom form styles. Including the credit memo in your communication helps customers understand why their balance changed and avoids confusion on their end.