What is a Credit Memo in QuickBooks Online and how does it affect a customer balance?

• A. A Credit Memo reduces a customer's Accounts Receivable balance and can be applied to an open invoice or used as a refund.
• B. A Credit Memo increases AR for future invoices.
• C. A Credit Memo records a vendor liability.
• D. A Credit Memo is used to record cash receipts from a customer.

Answer: (A)

A credit memo in QuickBooks Online represents a credit to a customer’s balance, typically issued for returns, overpayments, or allowances. By creating this document, you’re telling QuickBooks that the customer no longer owes as much as before. The impact is a reduction in Accounts Receivable. If there is an open invoice, you can apply the credit memo to that invoice, which lowers the amount due on that invoice and reduces the overall AR. If no invoice is outstanding, you can issue a refund to the customer using the credit memo.

It doesn’t increase AR for future invoices, since it’s a reduction of what’s already owed. It doesn’t record a vendor liability, which would pertain to what you owe to suppliers. And it isn’t itself a cash receipt from a customer; it’s a correction to amounts the customer owes, potentially followed by a separate refund or application to existing charges.