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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.

Basic - No Discount

A sales invoice for 1,200.00 is posted on January 1, 2017. This amount is deferred over 12 months with Equal per Period option selected on the deferral schedule. The following deferral schedule is created.  The first five months (January - May) of the deferral schedule are recognized or stubbed.

Sequence Deferral Start Date Deferral End Date Amount Recognized General Journal Ref.
1 January 01, 2017 January 31, 2017 100.00 X Stubbed
2 February 01, 2017 February 28, 2017 100.00 X Stubbed
3 March 01, 2017 March 31, 2017 100.00 X GL01
4 April 01, 2017 April 30, 2017 100.00 X GL02
5 May 01, 2017 May 31, 2017 100.00 X GL03
6 June 01, 2017 June 30, 2017 100.00    
... ... ... ... ... ...
12 December 01, 2017 December 31, 2017 100.00    

The following examples demonstrate what happens when credit memos are applied.

Example 1: Credit memo applied for 250.00, recalculation date is June 1 and end date is October 31.

  • Amount per period = (1,200 – 250 – 500) / 5 = 90.00

    • *note that only 5 months are left June – October

  January February March April May June July August September October November December
Amount 100.00 100.00 100.00 100.00 100.00 90.00 90.00 90.00 90.00 90.00    
Recognized X X X X X              

Example 2: Credit memo applied for 250.00, recalculation date is January 1 and end date is October 31.

  • Amount per period = (1,200 – 250) / 10 = 95.00
  • True-up amount = (95 – 100) * 5 = -25.00
  • True-up line = 95 – 25 = 70.00

    • *note that only 10 months are left January – October

  January February March April May June July August September October November December
Amount 100.00 100.00 100.00 100.00 100.00 70.00 95.00 95.00 95.00 95.00    
Recognized X X X X X              

Example 3: Credit memo applied for 600.00, recalculation date is June 1 and end date is October 31.

  • Amount per period = (1,200 – 600 – 500) / 5 = 20.00
  January February March April May June July August September October November December
Amount 100.00 100.00 100.00 100.00 100.00 20.00 20.00 20.00 20.00 20.00    
Recognized X X X X X              

Example 4: Credit memo applied for 600.00, recalculation date is January 1 and end date is October 31.

  • Amount per period = (1,200 – 600) / 10 = 60.00
  • True-up amount = (60 – 100) * 5 = , 200.00
  • True-up line = 60 – 200 = -140.00
  January February March April May June July August September October November December
Amount 100.00 100.00 100.00 100.00 100.00 -140.00 60.00 60.00 60.00 60.00    
Recognized X X X X X              

Example 5: Credit memo applied for 600.00, recalculation date is March 1 and end date is October 31.

  • Amount per period = (1,200 – 600 – 200) / 8 = 50.00

    • *note that the 8 is because the first two lines are not affected by the adjustment

  • True-up amount = (50 – 100) * 3 = -150.00
  • True-up line = 50 – 150 = -100.00
  January February March April May June July August September October November December
Amount 100.00 100.00 100.00 100.00 100.00 -100.00 50.00 50.00 50.00 50.00    
Recognized X X X X X              

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Discount/COGS – Defer Discount Separately

A sales invoice of 4,000.00 with a 10% discount is posted on January 1, 2017. This amount is deferred over 12 months with a monthly frequency.

Note icon. Note: The COGS is assumed to be 350.60. For a 12-month schedule, the COGS amount per period is 29.22.

Sequence Deferral Start Date Deferral End Date Revenue Discount COGS Recognized General Journal Ref.  
1 January 01, 2017 January 31, 2017 333.33 33.33 29.22 X Stubbed ...
2 February 01, 2017 February 28, 2017 333.33 33.33 29.22 X Stubbed ...
3 March 01, 2017 March 31, 2017 333.33 33.33 29.22 X GL01 ...
4 April 01, 2017 April 30, 2017 333.33 33.33 29.22 X GL02 ...
5 May 01, 2017 May 31, 2017 333.33 33.33 29.22 X GL03 ...
... ... ... ... ... ... ... ... ...
12 December 01, 2017 December 31, 2017 333.33 33.33 29.22     ...

Example A: Credit memo applied for 600.00 with a 10% discount specified on the credit memo, recalculation date is June 1 and end date is October 31.

  • Revenue:
    • New revenue amount = 4,000 – 600= 3,400.00
    • Amount per period = (3,400 - 1,667) / 5 = 347.00
  January February March April May June July August September October November December
Revenue 333.33 333.33 333.33 333.33 333.33 347.00 347.00 347.00 347.00 347.00    
Recognized X X X X X              
  • Discount:
    • Invoice discount = 4,000 * 10% = 400.00
    • Credit memo discount = 600 * 10% = 60.00
    • Amount per period = (400 - 60 – 167) / 5 = 35.00
  January February March April May June July August September October November December
Discount 33.33 33.33 33.33 33.33 33.33 35.00 35.00 35.00 35.00 35.00    
Recognized X X X X X              
  • COGS:
    • Amount per period = (29.22 * 7) / 5 = 41.00

    • *note that only 5 months are left June – October

  January February March April May June July August September October November December
COGS 29.22 29.22 29.22 29.22 29.22 41.00 41.00 41.00 41.00 41.00    
Recognized X X X X X              

Example B: Credit memo applied for 600.00, recalculation date is January 1 and end date is October 31.

  • Revenue:
    • New revenue amount = 4,000 - 600 = 3,400.00
    • Amount per period = 3,400 / 10 = 340.00
    • True-up amount = (340 - 333) * 5 = 35.00
    • True-up line = 340 + 35 = 375.00
  January February March April May June July August September October November December
Revenue 333.33 333.33 333.33 333.33 333.33 375.00 340.00 340.00 340.00 340.00    
Recognized X X X X X              
  • Discount:
    • Invoice discount = 4,000 * 10% = 400.00
    • Credit memo discount = 600 * 10% = 60.00
    • Amount per period = (400 - 60) / 10 = 34.00
    • True-up amount = (34 - 33) * 5 = 5.00
    • True-up line = 34 + 5 = 39.00
  January February March April May June July August September October November December
Discount 33.33 33.33 33.33 33.33 33.33 39.00 34.00 34.00 34.00 34.00    
Recognized X X X X X              
  • COGS:

    If a credit memo is applied, the COGS amount is not affected, but only adjusted because the length of the schedule has changed:

    • Amount per period = 351 / 10 = 35.00
    • True-up amount = (29 - 35) * 5 = -30.00
    • True-up line = 35 + 30 = 65.00

    If a return is applied, the COGS amount is affected because all or part of the item is returned.

    Return scenario 1: Assume the COGS amount changed between invoice and return.

    • Amount per period = (351 - 250) / 10 = 10.00
    • True-up amount = (29 - 10) * 3 = 57.00
    • True-up line = 10 - 57 = -47.00

    Return scenario 2: Assume the COGS amount did not change between invoice and return.

    • Amount per period = 351 (original COGS) - 351 (returned COGS) = 0.00
      *note that only 10 months are left January – October
COGS January February March April May June July August September October November December
Credit Memo 29.22 29.22 29.22 29.22 29.22 65.00 35.00 35.00 35.00 35.00    
Return 1
COGS less than original		 29.22 29.22 29.22 29.22 29.22 -47.00 10.00 10.00 10.00 10.00    
Return 2
COGS same as original		 29.22 29.22 29.22 29.22 29.22 0.00            
Recognized X X X X X              

Example C: Credit memo applied for 600.00, recalculation date is March 1 and end date is October 31.

  • Revenue:
    • New revenue amount = 4,000 - 600 – 666 = 2,734.00
    • Amount per period = 2,734 / 8 = 342.00
    • True-up amount = (342 - 333) * 3 = 27.00
    • True-up line = 342 + 27 = 369.00
  January February March April May June July August September October November December
Revenue 333.33 333.33 333.33 333.33 333.33 369.00 342.00 342.00 342.00 342.00    
Recognized X X X X X              
  • Discount:
    • Invoice discount = 4,000 * 10% = 400.00
    • Credit memo discount = 600 * 10% = 60.00
    • Amount per period = (400 - 60) / 10 = 34.00
    • True-up amount = (34 - 33) * 3 = 3.00
    • True-up line = 34 + 3 = 37.00
  January February March April May June July August September October November December
Discount 33.33 33.33 33.33 33.33 33.33 37.00 34.00 34.00 34.00 34.00    
Recognized X X X X X              
  • COGS:

    If a credit memo is applied, the COGS amount is not affected, but only adjusted because the length of the schedule has changed:

    • Amount per period = (351 – 58) / 8 = 37.00
    • True-up amount = (29 - 37) * 3 = -24.00
    • True-up line = 37 + 24 = 61.00

    If a return is applied, the COGS amount is affected because all or part of the item is returned.

    Return scenario 1: Assume the COGS amount changed between invoice and return.

    • Amount per period = (351 - 250 - 58) / 8 = 5.00
    • True-up amount = (29 - 5) * 3 = 72.00
    • True-up line = 5 - 72 = -67.00

    Return scenario 2: Assume the COGS amount did not change between invoice and return.

    • Amount per period = 351 (original COGS) - 351 (returned COGS) – 58 = -58.00
COGS January February March April May June July August September October November December
Credit Memo 29.22 29.22 29.22 29.22 29.22 61.00 37.00 37.00 37.00 37.00    
Return 1
COGS less than original		 29.22 29.22 29.22 29.22 29.22 -67.00 5.00 5.00 5.00 5.00    
Return 2
COGS same as original		 29.22 29.22 29.22 29.22 29.22 -58.00            
Recognized X X X X X              

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Discount/COGS – Include Discount in Net Revenue

A sales invoice of 4,000.00 with a 10% discount is posted on January 1, 2017. This amount is deferred over 12 months with a monthly frequency.

  • Revenue amount = 4,000 - 400 = 3,600.00
  • Revenue amount per period = 3,600 / 12 = 300.00

Note icon. Note: The COGS is assumed to be 350.60. For a 12-month schedule, the COGS amount per period is 29.22.

Sequence Deferral Start Date Deferral End Date Amount Discount COGS Recognized General Journal Ref.
1 January 01, 2017 January 31, 2017 300.00   29.22 X Stubbed
2 February 01, 2017 February 28, 2017 300.00   29.22 X Stubbed
3 March 01, 2017 March 31, 2017 300.00   29.22 X GL01
4 April 01, 2017 April 30, 2017 300.00   29.22 X GL02
5 May 01, 2017 May 31, 2017 300.00   29.22 X GL03
... ... ... ...   ... ... ...
12 December 01, 2017 December 31, 2017 300.00   29.22    

Example A: Credit memo applied for 400.00, recalculation date is June 1 and end date is October 31.

  • Revenue:
    • New revenue amount = (3,600 – 400 - 1,500) / 5 = 340.00
  January February March April May June July August September October November December
Revenue 300.00 300.00 300.00 300.00 300.00 340.00 340.00 340.00 340.00 340.00    
Recognized X X X X X              
  • COGS:
    • Amount per period = (29.22 * 7) / 5 = 41.00

    *note that only 5 months are left June – October

  January February March April May June July August September October November December
COGS 29.22 29.22 29.22 29.22 29.22 41.00 41.00 41.00 41.00 41.00    
Recognized X X X X X              

Example B: Credit memo applied for 400.00, recalculation date is January 1 and end date is October 31.

  • Revenue:
    • New revenue amount = 3,600 - 400 = 3,200.00
    • Amount per period = 3,200 / 10 = 320.00
    • True-up amount = (300 - 320) * 5 = -100.00
    • True-up line = 320 + 100 = 420.00
  January February March April May June July August September October November December
Revenue 300.00 300.00 300.00 300.00 300.00 420.00 320.00 320.00 320.00 320.00    
Recognized X X X X X              
  • COGS:

    If a credit memo is applied, the COGS amount is not affected, but only adjusted because the length of the schedule has changed:

    • Amount per period = 351 / 10 = 35.00
    • True-up amount = (29 - 35) * 5 = -30.00
    • True-up line = 35 + 30 = 65.00

    If a return is applied, the COGS amount is affected because all or part of the item is returned.

    Return scenario 1: Assume the COGS amount changed between invoice and return.

    • Amount per period = (351 - 250) / 10 = 10.00
    • True-up amount = (29 - 10) * 3 = 57.00
    • True-up line = 10 - 57 = -47.00

    Return scenario 2: Assume the COGS amount did not change between invoice and return.

    • Amount per period = 351 (original COGS) - 351 (returned COGS) = 0.00
      *note that only 10 months are left January – October
COGS January February March April May June July August September October November December
Credit Memo 29.22 29.22 29.22 29.22 29.22 65.00 35.00 35.00 35.00 35.00    
Return 1
COGS less than original		 29.22 29.22 29.22 29.22 29.22 -47.00 10.00 10.00 10.00 10.00    
Return 2
COGS same as original		 29.22 29.22 29.22 29.22 29.22 0.00            
Recognized X X X X X              

Example C: Credit memo applied for 400.00, recalculation date is March 1 and end date is October 31.

  • Revenue:
    • New revenue amount = 3,600 - 400 - 600 = 2,600.00
    • Amount per period = 2,600 / 8 = 325.00
    • True-up amount = (300 - 325) * 3 = -75.00
    • True-up line = 325 + 75 = 400
  January February March April May June July August September October November December
Revenue 300.00 300.00 300.00 300.00 300.00 400 325.00 325.00 325.00 325.00    
Recognized X X X X X              
  • COGS:

    If a credit memo is applied, the COGS amount is not affected, but only adjusted because the length of the schedule has changed

    • Amount per period = (351 – 58) / 8 = 37.00
    • True-up amount = (29 - 37) * 3 = -24.00
    • True-up line = 37 + 24 = 61.00

    If a return is applied, the COGS amount is affected because all or part of the item is returned.

    Return scenario 1: Assume the COGS amount changed between invoice and return.

    • Amount per period = (351 - 250 - 58) / 8 = 5.00
    • True-up amount = (29 - 5) * 3 = 72.00
    • True-up line = 5 - 72 = -67.00

    Return scenario 2: Assume the COGS amount did not change between invoice and return.

    • Amount per period = 351 (original COGS) - 351 (returned COGS) – 58 = -58.00
COGS January February March April May June July August September October November December
Credit Memo 29.22 29.22 29.22 29.22 29.22 61.00 37.00 37.00 37.00 37.00    
Return 1
COGS less than original		 29.22 29.22 29.22 29.22 29.22 -67.00 5.00 5.00 5.00 5.00    
Return 2
COGS same as original		 29.22 29.22 29.22 29.22 29.22 -58.00            
Recognized X X X X X              

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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: 

Event Description Expiry Date Event Amount
Training March 31, 2018 2,500.00
Implementation   5,000.00
Maintenance   2,000.00
Credit   -950.00

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

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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

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