What is the purpose of issuing a credit memo?

Issuing a credit memo serves the primary purpose of reversing a charge that has been billed to a customer. When a customer has been overbilled, a transaction needs to be adjusted to reflect the accurate amount owed. A credit memo facilitates this adjustment by providing documentation that effectively negates a portion of the invoice, showing that the customer no longer owes the originally billed amount.

For instance, if a customer was charged for a product that was either returned or found to be defective, a credit memo would allow the company to acknowledge the return and reduce the customer's outstanding balance accordingly. This helps maintain accurate financial records and adheres to proper accounting practices by ensuring that customers are only charged for the goods or services they have actually received.