Welcome to the topic on A/R credit memos in SAP Business One, we will discuss how to correct issues that occur after an A/R invoice has been created.  We will see how to create A/R Credit Memos and how to cancel an A/R invoice.

I/ Business Scenario

As part of the initiative to improve customer satisfaction, the company has begun studying how to best correct issues that occur after invoicing.

The key document for correcting invoicing issues is the A/R Credit Memo.  A/R credit memos are used to correct problems with invoice pricing as well as to allow items to be returned for credit.

Another tool for correcting issues is the ability to cancel a marketing document.  The company uses this option when incorrect A/R invoices are created.

II/ Correction Documents

The two main correction documents for the sales process are the Return document and the A/R Credit Memo.

A previous topic discussed how to use the Return document when problems arise from a delivery.

However a Return document cannot be used once an A/R invoice is created.

The A/R Credit Memo (or credit note) is the document used to process returned items or to give a pricing credit, once an A/R invoice has been issued.

Another option for correcting invoicing issues is to cancel an invoice and reissue it.

II/ Credit Memo

In our business example, the customer is disappointed in the performance of the camera they ordered.

So they have decided to return the camera.

Our item cost for the camera was 50.

The camera was invoiced at the price of 100.

Since the camera had already been invoiced, we had to use a credit memo to process the return.

The A/R credit memo reverses both the invoice posting and the delivery posting.

An A/R credit memo (also called a credit note) reverses either partially or fully the journal entry created by an A/R invoice.

When you create an A/R credit memo with reference to the A/R invoice, the system corrects both the quantities and values in the A/R invoice.

• The system increases the stocks of the credited items.
• The system credits the credit memo value to the customer's account in the general ledger and corrects the revenue by the same amount

If the credit memo is an item-type credit memo with rows for inventory items, then the journal entry for the credit memo will also increase the stock account and decrease the cost account.

1/ Credit without Return to Stock

As we just saw, an item-type credit memo normally returns items to stock as well as gives a credit for the items.

If you wish to give a credit, but not create a goods movement, you have two choices.

You can create an item-type credit memo and select the checkbox Without Qty posting on the item row, or you can use a service-type credit memo. 

The advantage using an item-type credit memo and the Without Qty posting checkbox is that an item-type credit memo can be copied from an item-type A/R invoice.  Only an item-type credit memo, can you list the item numbers.

Neither of these are possible with a service-type credit memo.  Therefore, the service-type credit memo is best used for crediting services or for circumstances where you do not wish to reference the invoice as a base document.

Let us look at an example of creating an item-type credit memo without a quantity posting to inventory.

In this case, a customer’s camera breaks.  Unlike our last example, we do not require the customer returns the item to receive credit.

As before, the original cost is 50 and the invoiced price is 100.

We once again reference the original invoice and create an item-type credit memo.  However, this time we select the checkbox “Without Qty Posting”.

The customer receives full credit for the item and no stock postings are made.

2/ Credit Memo without Reference

When a customer returns items that do not refer to a specific invoice or if the A/R invoice status is closed because the invoice was paid, you can post this quantity directly to the warehouse without referencing a preceding document.

If the credit memo is for inventory items, then the stock and stock value increase as a result.

If you do not wish to reverse the stock posting and cost postings, you once again have the option to use the checkbox “Qty without Posting” to eliminate the goods movement. 

Then the only posting is to reverse the postings to revenue and customer accounts.

III/ Cancellation

Sometimes it is not appropriate to create a credit memo, instead you prefer to cancel the original document.

Business One gives you the ability to cancel marketing documents such as an incorrect invoice.

When you cancel a marketing document, a new ‘cancellation’ document is created with a reversal posting including quantities and its status is set to Closed – Cancellation. The original A/R invoice posting remains and the status is updated to Cancelled.  Both the reversing and reversed documents are closed automatically and fully reconciled.

Canceling a document saves time because any relevant accounting, fiscal, financial and inventory transactions are completely reversed in one step.

Base documents, such as a delivery, are re-opened after cancellation, and can be used as a base document again.

Reporting is available for cancelled documents, since the original posting remains in the system along with the cancellation.

You have the flexibility to set a maximum number of days for allowing cancellation after documents are posted, and relevant authorizations support this process.

Example

A customer was invoiced before all items on the sales order were delivered.

The customer had asked that they not be invoiced until the full order was received.

The customer had ordered several items on a sales order which were partially delivered.  When these items were invoiced the delivery document status was Closed and the open quantity on the delivery was 0.

To resolve the customer’s complaint, the invoice is canceled.  The cancellation creates an A/R invoice with reversed amounts.

The original delivery reopens.  A second delivery is made.

Now because the full quantity is sent to the customer, the customer can be invoiced for the full sales quantity.

IV/ Summary

Here are some key points:

• An A/R credit memo reverses an A/R invoice’s journal entry either partially or fully.
• When you create an A/R credit memo with reference to the A/R invoice, the system corrects both the quantities and values in the invoice.
• If the credit memo contains inventory items, then the journal entry for the credit memo will also increase the stock account and decrease the cost account.
• A credit memo can be created without reference to a base document, for example when you need to credit closed invoices that have been paid or for when the credit does not relate to any specific invoices.
• If you wish to give a credit without an impact to stock, you can select the checkbox Without Qty posting on an item row in an item-type credit memo, or you can use a service-type credit memo. 
• You can cancel marketing documents such as A/R invoices.  A new reversing ‘cancellation’ document is created during each cancellation procedure, and both the reversing and reversed documents are closed automatically and fully reconciled.
• Base documents, such as a delivery, are re-opened after cancellation, and can be used as a base document again.