How to Adjust Customer Account Balances Using Credit Memos

Contents 1 Objective 2 Recommended articles 3 Execution Steps 3.1 Creation of a G/L Item 3.2 Creation of an A/R Credit Memo 4 Result

Objective

Sometimes it is necessary to provide credit to customers as a gesture of accommodation, for instance:

• products sold may have been accepted but of the wrong kind
• the shipment may have been damaged but usable
• or the quality may have not met the standards of the company that agreed to purchase them.

There are many unexpected situations in which sellers may adjust accounts of their customers, giving credit against the balance due.
Trade with customers isn’t a mechanical exercise, it is a relationship in which many unexpected things happen, for instance:

• The customer reported that the product they received did not pass quality inspection upon receipt. They were, however, happy to keep the products rather than to return them, expecting a price accommodation instead.
• The company in this example will credit the customer A/R and will debit an expense. In this case they wish to separately track the expense associated with product deficiencies to further understand the cost of selling their products. In other words, the company in this example needs to be able to alter an outstanding customer balance through the issue of a Credit Memo to the customer.

The issuing of a Credit Memo will allow the company to reduce the customer’s outstanding obligation to it by crediting accounts receivable as shown below:

Non-conforming Product Expense $X.XXX,XX

Trade Receivables $X.XXX,XX

- to record price accommodation for noted defects in product shipped.

Recommended articles

Crediting accounts receivable by using a credit memo requires a clear understanding on how to create a GL item as well as the way they are used in Sales Financial Invoices.

It is highly recommended to understand how Sales Document types are configured in Openbravo and how Credit Sales Invoices can be created as well.

Execution Steps

In Openbravo, the company in this example will have to issue a credit memo by using a specific accounting item or GL Item.

Creation of a G/L Item

The company in this example will issue a Credit Memo that does not involve the return of goods.
Credit memo is considered a financial invoice in Openbravo terminology, which distinguishes it from invoices that relate to products and services.

To process a financial invoice for the credit memo, a G/L_Item must be created first, a G/L Item called Product Defects by example, mapping the G/L Item to an expense account of the same name. In practice you may use any G/L item related to any expense account to record the debit transaction that will be posted.

The above window shows the G/L item created to process the credit memo. Note that when you create a G/L item for the credit memo, you need to select the Enable in Financial Invoices checkbox and the G/L item needs to be assigned to an expense account named in both GL Item Debit Acct and GL Item Credit Acct fields, both fields can be found in the Accounting tab of the G/L Item window.

Creation of an A/R Credit Memo

In order to credit the customer account, an A/R Credit Memo is raised:

• A Sales Invoice is created for the business partner, using the AR Credit Memo Transaction document.
• Since this is a financial invoice, not an invoice for products or services, the Financial Invoice Line check box needs to be selected by navigating to the More Information section in Lines.
• Above reveals the Account field. This is where you designate the G/L Item created in the previous step.
• The Invoiced Quantity, the Net Unit Price and Net List Price must be indicated.
  • Note: these should be indicated as positive values, not negative because this way of crediting the customer does not imply a return of the goods.
• Enter the Tax field.
• Last step is to Complete and Post the credit financial invoice in the ordinary way.

Below shows the posting created for the Credit Memo:

• The Debit entry came from the G/L item (in this example the G/L item was associated with account 5360 - Product Expense)
• The credit account came from the Business Partner Customer Accounting tab.

Result

This completes the creation and processing of the credit memo. As a result:

• the Customer balance is reduced by the amount required
• and a justification document is issued which Customer can record in its system