In this article

Credit Memo: Examples

Review the following credit memo examples to better understand how a deferral schedule changes when credit memos are applied.

Note icon. Note: These examples demonstrate the functionality of the credit memo functionality. The values might not be exact due to rounding.

1. Basic - No Discount

A sales invoice for 1,200.00 is posted on January 1, 2020. The amount is deferred over 12 months using the Equal per Period option on the Deferral Schedule. This creates a schedule where the revenue is spread evenly across each month. The first five months of the schedule (January to May) have already been recognized.

The cost of the item is 800.00 and the quantity sold is 1.

Therefore, the Deferral Schedule (Original Invoice – 1,200.00 over 12 months and 5 Periods recognized) will appear as the following:

Month Revenue Amount COGS Recognized
Jan 20 100 66.66 X
Feb 20 100 66.66 X

Mar 20

 100 66.66 X
Apr 20 100 66.66 X
May 20 100 66.66 X
Jun 20 100 66.66  
Jul 20 100 66.66  
Aug 20 100 66.66  
Sep 20 100 66.66  
Oct 20 100 66.66  
Nov 20 100 66.66  
Dec 20 100 66.66  
Jan 21 100 66.66  

The General Ledger entries will display as below.

    DR CR
Deferred Revenue   500.00  
  Revenue   500.00
COGS   333.33  
  Deferred COGS   333.33

A Create Credit Memo is created for 500.00 with Return Quantity = 1 against the posted Sales Invoice and then posted. This updates the Deferral Schedule by canceling the remaining balance and changing the status to Completed.

Deferred Revenue   700.00  
  Revenue   700.00
Revenue   500.00  
  AR   500.00
  Inventory Adjustment   0.00
Deferred COGS   333.33  
Deferred COGS   800.00
  Inventory Adjustment   333.33
Inventory   800.00  

Deferral Schedule values will display as below.

Deferral Schedule Values Example

 

2. Return at Same Location with Different Cost

A sales invoice for 1,200.00 is posted on January 1, 2020. The amount is deferred over 12 months using the Equal per Period option on the Deferral Schedule. This creates a schedule where the revenue is spread evenly across each month. The first nine months of the schedule (January to September) have already been recognized.

The cost of the item is 800.00 and the quantity sold is 1.

Month Revenue Amount COGS Recognized
Jan 20 100 66.67 X
Feb 20 100 66.67 X

Mar 20

 100 66.67 X
Apr 20 100 66.67 X
May 20 100 66.67 X
Jun 20 100 66.67 X
Jul 20 100 66.67 X
Aug 20 100 66.67 X
Sep 20 100 66.67 X
Oct 20 100 66.67  
Nov 20 100 66.67  
Dec 20 100 66.67  
Jan 21 100 66.67  

The General Ledger entries will display as below.

    DR CR
Deferred Revenue   900.00  
  Revenue   900.00
COGS   600.00  
  Deferred COGS   600.00

A Create Credit Memo is created for 600.00 with Return Quantity = 1 against the posted Sales Invoice and is then posted. This updates the Deferral Schedule by canceling the remaining balance and changing the status to Completed.

Note: While making a Return at the same time, the cost of item is changed to 850.00.

Deferred Revenue   300.00  
  Revenue   300.00
Revenue   600.00  
  AR   600.00
  Inventory Adjustment   -
Deferred COGS   600.00  
Deferred COGS   800.00
  Inventory Adjustment   650.00
Inventory   900.00  
  PPV   50.00

Deferral Schedule values will display as below.

Deferral Schedule Example 3

3. Return at Different Location

A sales invoice for 1,200.00 is posted on January 1, 2020. The amount is deferred over 12 months using the Equal per Period option on the Deferral Schedule. This creates a schedule where the revenue is spread evenly across each month. The first nine months of the schedule (January to September) have already been recognized.

The cost of the item is 800.00 and the quantity sold is 1.

Month Revenue Amount COGS Recognized
Jan 20 100 66.67 X
Feb 20 100 66.67 X

Mar 20

 100 66.67 X
Apr 20 100 66.67 X
May 20 100 66.67 X
Jun 20 100 66.67 X
Jul 20 100 66.67 X
Aug 20 100 66.67 X
Sep 20 100 66.67 X
Oct 20 100 66.67  
Nov 20 100 66.67  
Dec 20 100 66.67  
Jan 21 100 66.67  

The General Ledger entries will display as below.

    DR CR
Deferred Revenue   900.00  
  Revenue   900.00
COGS   600.00  
  Deferred COGS   600.00

The Create Credit Memo is created for 600.00 with Return Quantity = 1 against this posted Sales Invoice and is posted. This updates the Deferral Schedule by canceling the remaining balance and changing the status to Completed.

Note: While making a Return at a different location, the Cost Value is 900 (e.g., A Purchase from the East Location but Returning to the West Location.)

Deferred Revenue   300.00  
  Revenue   300.00
Revenue   600.00  
  AR   600.00
  Inventory Adjustment   - (rounding)
Deferred COGS   600.00  
Deferred COGS   800.00
  Inventory Adjustment   700.00
Inventory   900.00  
  PPV   -

Deferral Schedule values will display as below.

Deferral Schedule Example

4. Multiple Quantity Posted and Partial Return (3 Quantity Posted and 1 Return)

A sales invoice for 1,200.00 is posted on January 1, 2020. The amount is deferred over 12 months using the Equal per Period option on the Deferral Schedule. This creates a schedule where the revenue is spread evenly across each month. The first nine months of the schedule (January to September) have already been recognized.

The cost of the item is 800.00 and the quantity sold is 3.

Month Revenue Amount COGS Recognized
Jan 20 300 200 X
Feb 20 300 200 X

Mar 20

 300 200 X
Apr 20 300 200 X
May 20 300 200 X
Jun 20 300 200 X
Jul 20 300 200 X
Aug 20 300 200 X
Sep 20 300 200 X
Oct 20 300 200  
Nov 20 300 200  
Dec 20 300 200  
Jan 21 300 200  

The General Ledger entries will display as below.

    DR CR
Deferred Revenue   2700.00  
  Revenue   2700.00
COGS   1800.00  
  Deferred COGS   1800.00

The Create Credit Memo is created for 500.00 with Return Quantity = 1 against this posted Sales Invoice and is then posted. This updates the Deferral Schedule by canceling the remaining balance and changing the status to Completed.

Deferred Revenue   300.00  
  Revenue   300.00
Revenue   600.00  
  AR   600.00
  Inventory Adjustment   -
Deferred COGS   600.00  
Deferred COGS   800.00
  Inventory Adjustment   600.00
Inventory   800.00  
  PPV   -

Deferral Schedule values will display as below.

Deferral Schedule Example

5. Return With STLT

A sales invoice for 2400.00 is posted on January 1, 2020. The amount is deferred over 24 months using the Equal per Period option on the Deferral Schedule. This creates a schedule where the revenue is spread evenly across each month. Updated line:The first ten months of the schedule (January to October) have already been recognized.

The cost of the item is 1600.00 and the quantity sold is 1.

Month Revenue ST Revenue LT Cost ST Cost LT Recognized

Jan

 100.00   66.67   X
Feb 100.00   66.67   X

Mar

 100.00   66.67   X
Apr 100.00   66.67   X
May 100.00   66.67   X
Jun 100.00   66.67   X
Jul 100.00   66.67   X
Aug 100.00   66.67   X
Sep 100.00   66.67   X
Oct 100.00   66.67   X
Nov 100.00   66.67    
Dec 100.00   66.67    

Jan

 100.00   66.67    
Feb 100.00   66.67    

Mar

 100.00   66.67    
Apr 100.00   66.67    
May 100.00   66.67    
Jun 100.00   66.67    
Jul 100.00   66.67    
Aug 100.00   66.67    
Sep 100.00   66.67    
Oct 100.00   66.67    
Nov   100.00   66.67  
Dec   100.00   66.67  

The General Ledger entries will display as below.

    DR CR
Deferred Revenue ST   1000.00  
  Revenue   1000.00
COGS   666.67  
  Deferred COGS ST   666.67
Deferred Revenue LT   1000.00  
  Deferred Revenue ST   1000.00
Deferred COGS ST   666.67  
  Deferred COGS LT   666.67

The Create Credit Memo is created for 500.00 with Return Quantity = 1 against the posted Sales Invoice and is then posted. This updates the Deferral Schedule by canceling the remaining balance and changing the status to Completed.

Deferred Revenue ST   1200.00  
Deferred Revenue LT   200.00  
  Revenue   1400.00
Discount   -  
  Deferred Discount ST   -
  Deferred Discount LT   -
Revenue   500.00  
Discount   -
  AR   500.00
  Deferred COGS ST   800.00
  Deferred COGS LT   800.00
Deferred COGS ST   666.67  
Deferred COGS LT   666.67  
  Deferred COGS ST   666.67
  Inventory Adjustment   666.67
Def Revenue Suspense   500.00  
  Def Revenue Suspense Offset   500.00
Def COGS Suspense Offset   1600.00  
  Def COGS Suspense   1600.00
Def Discount Suspense Offset   -  
  Def Discount Suspense   -
Inventory   1600.00  
  PPV   -

6. Return With P&L and Discount Net

A sales invoice for 1,200.00 is posted on January 1, 2020. The amount is deferred over 12 months using the Equal per Period option on the Deferral Schedule. This creates a schedule where the revenue is spread evenly across each month. The first nine months of the schedule (January to September) have already been recognized.

Month Revenue Amount COGS Recognized
Jan 20 100 66.67 X
Feb 20 100 66.67 X

Mar 20

 100 66.67 X
Apr 20 100 66.67 X
May 20 100 66.67 X
Jun 20 100 66.67 X
Jul 20 100 66.67 X
Aug 20 100 66.67 X
Sep 20 100 66.67 X
Oct 20 100 66.67  
Nov 20 100 66.67  
Dec 20 100 66.67  
Jan 21 100 66.67  

The General Ledger entries will display as below.

    DR CR
Deferred Revenue   900.00  
  Revenue   900.00
COGS   600.00  
  Deferred COGS   600.00

The Create Credit Memo is created for 500.00 with Return Quantity = 1 against this posted Sales Invoice and is then posted. This updates the Deferral Schedule by canceling the remaining balance and changing the status to Completed.

Deferred Revenue   300.00  
Revenue   300.00
Revenue   500.00  
AR   500.00
  Inventory Adjustment   -
Deferred COGS   600.00  
  Deferred COGS   800.00
  Inventory Adjustment   600.00
Def Revenue Suspense   500.00  
  Def Revenue Suspense Offset   500.00
Def COGS Suspense Offset   800.00  
  Def COGS Suspense   800.00
Inventory   800.00  
  PPV   -

Event Based

A sales invoice of 9,500 for an event-based item has the following deferral schedule:

Event Description Expiry Date Event Amount
Training March 31, 2018 2,500.00
Implementation   5,000.00
Maintenance   2,000.00

A credit memo for 950 is created on June 15. The deferral schedule is updated as follows: 

Deferral Schedule Example

When credit memos are applied, a line with a negative amount for the credit memo is added to the deferral schedule.

Integration with ARCB

A sales invoice is created in ARCB with the following billing schedule: 

  • Billing schedule amount: 3,600.00
  • Dates: 2017-January 01 to 2019-December 31
  • Frequency: Annually
  • Fiscal periods (deferral frequency): Monthly
Billing Start Date Billing End date Deferral Start Date Deferral End Date Qty Unit Price Net Amount Billed Deferral Schedule
January 01, 2017 December 31, 2017 January 01, 2017 December 31, 2017 1 1,200 1,200.00 X ARED-1
January 01, 2018 December 31, 2018 January 01, 2018 December 31, 2018 1 1,200 1,200.00 X ARED-2
January 01, 2019 December 31, 2019 January 01, 2019 December 31, 2019 1 1,200 1,200.00 X ARED-3
  • Example A: The billing schedule is terminated on March 15, 2018 with the following settings: 
    • Deferral adjustment method: Unrecognized periods OR Entire schedule
    • Prorate daily: No
    • New schedule amount: 1200 - 900 = 300.00.
  • Deferral Schedule ARED-1: The schedule ends before the termination date. The deferral schedule is not changed.
  • Deferral Schedule ARED-2: The deferral schedule is changed based on the credit memo that is applied. Review updated deferral schedule.
  • Deferral Schedule ARED-3: The schedule starts after the termination date. The credit memo is applied to the full amount (1,200.00) of the deferral schedule. All lines are removed, and the status of the deferral schedule is changed to completed.
  January February March April May June July August September October November December
ARED-1 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
ARED-2 100.00 100.00 100.00 100.00 100.00 100.00 100.00 -400.00 Deleted Deleted Deleted Deleted
Recognized X X X X X X X          
ARED-3 Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted
  • Example B: The billing schedule is terminated on March 15, 2018 with the following settings: 
    • Deferral adjustment method: Unrecognized periods OR Entire schedule
    • Prorate daily: Yes
    New schedule amount: 1200 - 956.71 = 243.29
  • Deferral Schedule ARED-1: The schedule ends before the termination date. The deferral schedule is not changed.
  • Deferral Schedule ARED-2: The deferral schedule is changed based on the credit memo that is applied. Review updated deferral schedule.
  • Deferral Schedule ARED-3: The schedule starts after the termination date. The credit memo is applied to the full amount (1,200.00) of the deferral schedule. All lines are removed, and the status of the deferral schedule is changed to completed.
  January February March April May June July August September October November December
ARED-1 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
ARED-2 100.00 100.00 100.00 100.00 100.00 100.00 100.00 -456.71 Deleted Deleted Deleted Deleted
Recognized X X X X X X X          
ARED-3 Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted
  • Example C: The billing schedule is terminated on October 22, 2018, with the following settings: 
    • Deferral adjustment method: Unrecognized periods
    • Prorate daily: No
    New schedule amount: 1200 - 200 = 1000.00
  • Deferral Schedule ARED-1: The schedule ends before the termination date. The deferral schedule is not changed.
  • Deferral Schedule ARED-2: The deferral schedule is changed based on the credit memo that is applied. Review updated deferral schedule.
  • Deferral Schedule ARED-3: The schedule starts after the termination date. The credit memo is applied to the full amount (1,200.00) of the deferral schedule. All lines are removed, and the status of the deferral schedule is changed to completed.
  January February March April May June July August September October November December
ARED-1 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
ARED-2 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Deleted Deleted
Recognized X X X X X X X          
ARED-3 Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted
  • Example D: The billing schedule is terminated on October 22, 2018, with the following settings: 
    • Deferral adjustment method: Unrecognized periods
    • Prorate daily: Yes
    New schedule amount: 1200 - 230.14 = 969.86
    Number periods (for EPP calculation) = 2 + (22/31) = 2.7097
    Amount per period = (969.86 - 700) / 2.7097 = 99.59
    Last line = 99.59 * 0.7097 = 70.68
  • Deferral Schedule ARED-1: The schedule ends before the termination date. The deferral schedule is not changed.
  • Deferral Schedule ARED-2: The deferral schedule is changed based on the credit memo that is applied. Review updated deferral schedule.
  • Deferral Schedule ARED-3: The schedule starts after the termination date. The credit memo is applied to the full amount (1,200.00) of the deferral schedule. All lines are removed, and the status of the deferral schedule is changed to completed.
  January February March April May June July August September October November December
ARED-1 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
ARED-2 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.59 99.59

70.68

End = October 22

 Deleted Deleted
Recognized X X X X X X X          
ARED-3 Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted
  • Example E: The billing schedule is terminated on October 22, 2018, with the following settings: 
    • Deferral adjustment method: Entire schedule
    • Prorate daily: Yes

    New schedule amount: 1200 - 230.14 = 969.86
    Number periods (for EPP calculation) = 9 + (22/31) = 9.7097 ; Note icon. Note: If not using EPP, the calculation is based on days.
    Amount per period = 969.86 / 9.7097 = 99.89
    True up line = 99.89 - (100 - 99.89)*7 = 99.12

  • Deferral Schedule ARED-1: The schedule ends before the termination date. The deferral schedule is not changed.
  • Deferral Schedule ARED-2: The deferral schedule is changed based on the credit memo that is applied. Review updated deferral schedule.
  • Deferral Schedule ARED-3: The schedule starts after the termination date. The credit memo is applied to the full amount (1,200.00) of the deferral schedule. All lines are removed, and the status of the deferral schedule is changed to completed.
  January February March April May June July August September October November December
ARED-1 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
ARED-2 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.12 99.89

70.85

End = October 22

 Deleted Deleted
Recognized X X X X X X X          
ARED-3 Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted Deleted

Back to top ▲