Description
An AR Credit (Credit Memo) is a type of document used to reduce a customer’s outstanding accounts receivable balance. Essentially functioning as a negative Accounts Receivable Invoice, an AR Credit is processed as its own standalone document, separate from the original Invoice(s). When an AR Credit is issued, it decreases both the revenue recognized and the AR Receivable balance associated with the Customer. It is important to note that AR Credits are distinct from Cash Receipts, which are used to apply received payments against an open invoice. Cash Receipts represent actual payments received from customers whereas AR Credits represent discounts or refunds on receivables you do not plan to collect.
AR Credits are created when the total Amount for an Invoice is negative. AR Credits can be created in the User Interface, via Excel Upload, or via API.
AR Credits are different than Cash Receipts. Check out the Cash Receipts knowledge base article here -->
Add/Edit AR Credit
If adding an AR Credit in the UI, it would look something like the below. See that the Amount Total is negative when adding this Invoice.
Note: If adding Invoices with multiple lines, the sum of those lines would need to be a negative Amount for an AR Credit to be created rather than a Standard Invoice.
The fields and process for creating AR Credits matches that of standard AR Invoices, other than the total negative amount. Review the Invoice knowledge base article for more details how to complete the required/optional fields in Invoices -->
Process an AR Credit
The AR Credit is processed through the same process as a standard Invoice, with the selection of the Payment Method changed to Refund. See a knowledge base article detailing how to create cash receipts and pay Invoices -->
Steps to process the AR Credit:
Review and issue the AR Credit under the Invoices section in the Accounts Receivable module
Navigate to Cash Management > Receive Cash > Record Invoice Payments tab.
Under the Payment Method drop-down, select Refund and all issued AR Credits will appear in the table below. Find the AR Credit you'd like to process and populate the fields Amount to Pay (negative in this case), Payment Date (refund date in this case), Posted Date, and the optional Memo field
Select the Ledger Account that will be receiving the AR Credit in the top section of the screen (this will be the CREDIT side of the Refund Journal Entry - in most cases, an accounts receivable account)
Click Apply and Confirm
Once Confirmed, go to the AR Payments tab to approve and post the refund. (Note: if you have the setting to Auto-Approve AR Payments ON, you can skip this step).
Journal Entries from AR Credit Creation to Processing
Journal Entry at AR Credit Creation
At the time an AR Credit is created, the
Journal Entry at AR Credit Processing
DEBIT Accounts Receivable Account (user selected at Invoice creation step)
CREDIT Cash Account (user selected at Receive Cash step)
AR Aging Impact
When the AR Credit is created/approved, the AR Credit will impact the AR Aging report by being listed as a credit amount to the Customer in the Aging. See image below for sample AR Credit:
The Credit is then taken off of the Aging when the AR Credit is processed through the Cash Management>Receive Cash process.
Important Considerations
When an AR Credit is created, its status is 'created', and associated Journal Entries are created in 'draft' status.
An AR Credit's Journal Entries cannot be modified, you must edit the AR Credit itself and the associated Journals will be updated.
Once an AR Credit is approved, the Journal Entries will be posted.
AR Credits fall under the AR Ledger, and if attempting to close the AR task in Accounting Periods, AR Credits and their Refund Payments will need to be in Approved level of status at minimum in order to close the AR task.
The Payment Type for AR Credits will be listed in the AR Payments section as AR Refund for the Type (this allows for better ability to search and filter solely for AR Credits on the AP Payments tab).