How to Create and Apply a Credit Memo in QuickBooks Desktop

To create a credit memo in QuickBooks Desktop, go to Customers > Create Credit Memos/Refunds, select the customer, enter the items being credited, and save. QuickBooks then asks what to do with the credit: retain it, refund it, or apply it to an invoice. To apply a saved credit later, open Customers > Receive Payments and use Discounts and Credits.

A customer returns a product. You overcharged someone. A job got cancelled after invoicing. Now what — do you just delete the invoice?

Please don't. Deleting invoices erases history and makes a mess of your records. What you want is a credit memo: QuickBooks' official way of saying "we owe this customer money," with a full paper trail.

A credit memo reduces what the customer owes you (or records money you owe back to them). And once it's created, you get to decide what happens next — apply it to an open invoice, keep it as a credit for later, or refund it outright.

Here's the one confusion to clear up first: a credit memo is *not* a refund. A credit memo records the credit. A refund is what you do *with* the credit. QuickBooks walks you through both in one flow.

Before you start: what you’ll need

Not much, honestly:

The customer's name (they should already be in your Customer list).
The items you're crediting — credits in QuickBooks are item-based, just like invoices.
The invoice number, if you're applying the credit to a specific invoice. Handy to have, though not required.

How to create a credit memo, step by step

Step 1: Open the credit memo window

Go to the Customers menu at the top.
Click Create Credit Memos/Refunds.
A blank credit memo opens. It looks a lot like an invoice — that's on purpose.

Step 2: Select your customer

In the Customer:Job dropdown, choose the customer getting the credit.
If you have a specific job under that customer, select it too — credits attach to the job level when relevant.

Step 3: Enter what you’re crediting

In the line-item area, select the Item for each thing being credited — the same items from the original invoice, ideally.
Enter the quantity and rate. QuickBooks calculates the credit amount.
Add a memo explaining why: "Returned – damaged in shipping," "Overcharge correction," whatever applies. Future-you will thank present-you for this.
Check the Customer Message field if you want a note to print on the credit memo itself.

Step 4: Set the date and number

Date: Defaults to today. If the return happened earlier, use the actual date — it affects your reports.
Credit No.: QuickBooks numbers these automatically. Leave it unless you have your own system.

Step 5: Save it

Click Save & Close.
QuickBooks now pops up the Available Credit window — this is where you decide what happens to the credit. Don't skip this part.

What to do with the credit: your three options

When you save the credit memo, QuickBooks asks you to choose:

Option A: Retain as an available credit

The credit sits on the customer's account as a negative balance, waiting to be used. Pick this when the customer will apply it to a future invoice — or when you want to decide later.

Option B: Give a refund

QuickBooks writes a refund check (or records a cash refund) for the credit amount. Pick this when the customer wants their money back now. The refund check is filled out automatically — just review and click OK.

Option C: Apply to an invoice

QuickBooks opens the Apply Credit to Invoices window showing the customer's open invoices. Select the invoice, and the credit reduces its balance. Pick this when the customer has an unpaid invoice the credit should offset.

Choose one and click OK. That's the whole flow.

How to apply a saved credit later

Retained a credit and now the customer has an invoice to apply it to? Here's how:

Go to Customers > Receive Payments.
In the Received From dropdown, select the customer.
Leave the payment amount at zero — you're not recording a new payment, just applying existing credit.
Click the Discounts and Credits icon (bottom area of the window).
Go to the Credits tab, check the credit memo you want to apply, and click Done.
QuickBooks applies the credit to the invoice automatically. You'll see the balance drop.
Click Save & Close.

Common mistakes to avoid

Deleting the invoice instead of creating a credit memo. Deletions destroy your audit trail. A credit memo keeps everything visible: the original sale, the credit, and what happened to it. Auditors — and your accountant — will thank you.
Creating a credit memo without items. Credits need line items to post correctly to your income accounts. A credit memo with no items doesn't reduce the right revenue — it just confuses your reports.
Crediting the wrong customer or job. If you attach the credit to the wrong customer, it sits on the wrong account and never offsets the right invoice. Double-check the Customer:Job dropdown before saving.
Forgetting to actually apply a retained credit. Retained credits don't do anything on their own — they just sit there. If months pass and the customer's balance still shows the old amount, the credit was never applied. Check periodically.
Backdating into a closed period. Creating a credit memo with a date in a closed accounting period changes finalized numbers. Date the credit in the current period unless your accountant says otherwise.

Conclusion!

That brings us to the end of this guide on creating and applying a credit memo in QuickBooks Desktop. We hope the steps explained above helped you handle customer credits the right way — with clean records and no deleted invoices. If you run into any difficulty while following the steps, consider consulting a qualified and experienced QuickBooks professional for further assistance.

FAQs

What’s the difference between a credit memo and a refund?

A credit memo records that you owe the customer money — it reduces their balance in QuickBooks. A refund is the actual return of money (check or cash). You create the credit memo first, then choose "Give a refund" to send the money back. Or you can keep it as credit toward future invoices.

Can I apply one credit memo to multiple invoices?

Yes. In the Receive Payments window, after clicking Discounts and Credits and selecting the credit, QuickBooks applies it across the customer's open invoices — oldest first. If the credit covers more than one invoice, the remaining balance flows to the next one.

Can I apply only part of a credit memo to an invoice?

Not directly — QuickBooks applies the full available credit. If you only want to apply part of it, create the credit memo for that smaller amount instead.

Does a credit memo affect my sales tax?

It can, since sales tax is calculated based on the transaction date. If the credited items were taxable, the credit memo reduces the taxable sale accordingly. When in doubt — especially with closed periods — check with your accountant before finalizing.