Do you really know how to apply a credit memo, credit or refund for a customer?

Credit memos, credits and refunds can be confusing, so here is some information that will help explain the differences.  Sometimes, the wrong type of transaction is used.  If that is the case, you may need to delete the transaction and re-enter.

What's the difference between a credit memo, credit and a refund?

1.    A credit memo is a posting transaction which can be applied to a customer's invoice as a payment or reduction.

2.    A delayed credit is a non-posting transaction that you can include later on a customer's invoice.

3.    A refund is a posting transaction which is used when reimbursing a customer money.

This means that:

• Credit memos are used to offset an existing customer balance.
• Delayed Credits can be included only on an invoice.
• Delayed Credits don't affect a customer balance until they are included on a saved invoice.
• Refunds are used to show money given back to a customer to refund for services the customer is not happy with, to offset a credit balance, merchandise or service not received, or an overpayment.

1.    Entering a credit memo will affect your customer's balance, but may not affect a customer's invoice, until you make that decision.

2.    Entering a delayed credit will allow you to apply it as a line item on your customer's next invoice.

3.    Refunds given depending on the situation may or may not affect your customer's balance.

• Type 1: Refund for goods or services that didn't satisfy the customer. (Does not affect customer balance - accounts receivable (a/r), only the bank balance)
   Example: A customer already paid for an item, and is returning it for a full or partial refund.
• This option will provide a  Refund Receipt  to record reimbursements to customers via cash, check/cheque, or credit card. ( Select the product/service you are refunding, and the dollar amount of the refund.)
• Type 2: Pay the customer their outstanding credit balance. (Affects customer balance - a/r)
  Example: A customer has store credit, that they would like to have it paid out/redeemed for cash.
• This option will allow you to provide your customer a refund check/cheque in order to offset any open credits they would like paid out.
• Type 3: Refund for a prepaid order the customer hasn't received.  (Affects customer balance - a/r)
  Example: A customer prepaid an order which has been cancelled, and you need to refund the payment.
• This option is used when a client makes a down payment or prepayment and cancels the order before receiving the goods or services and no invoice or sales receipt was created. The option will lead you directly to entering in a check/cheque.
   
• Type 4: Refund the customer for paying you to much. (Affects customer balance - a/r)
  Example: A customer over-paid on an invoice, and you need to return the excess money.
• This option will allow you to provide a refund when a customer overpays and you want to give the customer money back (cash or a check/cheque) for the amount overpaid.

We hope you found this primer on credit memos, credits and refunds helpful.   

At Stenson Bookkeeping Simplified we provide bookkeeping training and best practices that make your company and staff the skills to be significantly more effective.  Email, text or phone  John L Mottram, at john@stensonfs.com or 214-543-1855 or go to our website at www.stensonfs.com. We are ready to help you.

Same sales bookkeeping questions every month? That’s insanity and you know what that means!

It may be time to adopt a new Best Practice – Posting Sales to the General Ledger

At STENSON Bookkeeping Simplified we hear that one of the biggest headaches for many bookkeeping departments is when confidence in the financial records starts to erode…especially in sales reporting!

It often starts with…”those sales can’t be right, you must have missed something. I know we had more sales last month than that!”

What happens next?

You take time out of your day, which you can’t spare, and jump in and look for some factor in the monthly sales transactions that might prove or disprove the rather negative assertion that came your way.

This takes a lot of time out of everybody’s schedule which is OK if there are missing sales but it’s a giant waste of time if it turns out sales postings are correct.

In many cases, your investigations show no sales missing. However, you still sense that your investigation isn’t fully accepted.  The person that asked the question only reluctantly accepts your analysis. This is the third month in a row that this question has come up! Can you see the insanity?

The person that asked the question is looking at your financial reports he’s reminded of his concern….those sales are just too low!  The feeling that the books are understating sales never really goes away.

Here’s the problem

There are just too many things going on in a single posting of monthly sales that it is impossible to settle on a single characteristic that can correlate it to something that explain how sales are performing.

There are just too many reasons that can explain the sales posting.

It could be

-a real drop in units shipped/delivered,

-it could be less working days in the month,

-it could be customer credits, refunds, discounts, return of material

-or that dreaded catch-all customer mix, product mix.

The sales cycle may not be daily, weekly or even monthly; there may be prepayments and even deferred revenue to consider.  Comparing daily, weekly or even monthly sales values may not help.

There are no standard reports that are prepared to keep the company informed of sales activity during the month on a regular basis, daily, weekly and business owners. 

Only reviewing sales days or even weeks after the end of the month when memories are failing when the focus of the company’s personnel has shifted to the issues of today.

Here’s the solution.

The problem can often be resolved by adopting a BEST PRACTICE FOR POSTING SALES.

Here it is:

1.     Distinguish sales transactions between Separate Standard Sales Postings from Non-Standard Postings.

 Standard Sales Posting must be ONLY the unadjusted amount billed for products shipped or services provided as reported in an operational customer order sub-system. By the way… once this sub ledger is approved by operational staff it does not change.

 2.  Non-Standard Posting must be posted to separate sub-accounts by type:

i)     Customer Credits/Refunds

ii)    Customer Prepayments

iii)   Deferred Revenue

iv)   Discounts

v)    Raw of Material

vi)   Other/Miscellaneous

3.    Prepare separate sales journals for Standard Sales Postings and each type of Non Standard transaction.

4.    Make sure journals are approved as soon after the close for the accounting month as possible.

5.    Make sure that the monthly financial reports are not the first time key managers see monthly sales postings.

6.    Before you issue the monthly financial reports, correlate each type of sales posting transactions to a previous month or some other characteristic to show how that type is performing.

7.    Make corrections as needed.

At STENSON Bookkeeping Simplified we can provide your organization with the skills needed in today’s increasingly hectic bookkeeping environment to perform at its peak.   Use our Best Practice SOPs. Phone, text or email John L Mottram at 214-543-1855 for more details.