View source for How to Adjust Customer Account Balances Using Credit Memos

== 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.<br>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 [[G/L_Item|GL item]] as well as the way they are used in [[Sales_Invoice#Lines|Sales Financial Invoices]].

It is highly recommended to understand how [[Document_Type|Sales Document types]] are configured in Openbravo and how [[Sales_Invoice#Header|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 [[Sales_Invoice#Header| Credit Memo]] that does not involve the return of goods.
<br> 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.

[[File:HowToAdjustCustomerBalance_GLitemCreation.png|800px]]

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 [[ManualDoc:T800034 | 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.

[[File:HowtoadjusttcustomercreditbalanceusingCreditmemoexample_CM_headerandline.jpg | 800px]]

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 | Business Partner Customer Accounting]] tab.

[[File:HowToAdjustCustomerBalanceUsingCreditMemo Financial invoice cm journal entry.jpg]]

== Result ==
This completes the creation and processing of the credit memo. As a result:
* the [[Business_Partner#Customer | Customer balance]] is reduced by the amount required
* and a justification document is issued which Customer can record in its system

[[Category:HowTo_Process]]