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A credit memorandum, or credit memo, is a note a financial institution sends a client, informing the customer about an incremental change in account balances. In other words, the memo conveys a piece of good news to the client, generally because the institution has added funds to the customer's account. Although a credit memo has more semantic popularity in banking terminology, other financial and nonfinancial institutions may issue a credit note to customers. For example, an insurance company may send a credit memo to a policyholder, advising the customer of a future refund to correct a premium overpayment.
A credit memo increases cash in a client's account --- and, thus, has an incremental effect on the customer's bank statement. Simply put, the memo brings more money into the client's pocket. Credit memos can result from various situations, including previously planned arrangements such as interest on savings accounts and certificates of deposit, one-time adjustments to correct bank errors and refunds coming from entities as diverse as credit card companies, department stores and grocery outlets. For example, if you use a bank card to purchase
food and ultimately demand a refund, the grocery store credits your card back, resulting in a credit memo on your bank statement.
Setting the Record Straight
Banks --- and all businesses, for that matter --- issue credit memos to correct numerical inaccuracies, setting the record straight with respect to client money, interest charges, and recurring or nonrecurring financial fees. By sending accurate periodic statements, banks predicate their financial correctness strategy on the notion that customers who are happy about statement transparency are more likely to do more business and bring in more cash. Eventually, satisfied clients may create a web of relationships between banks, relatives and business partners --- a rapport that could benefit financial institutions and generate a string of recurring revenues down the road.
The accounting notion of credit is distinct from the banking terminology. When a bookkeeper credits a financial account, the junior accountant increases or reduces the account's worth, depending on the underlying transaction and applicable regulatory guidelines. The bookkeeper credits an expense or asset account to reduce the account's balance and does the same thing to increase an equity, liability or revenue account's amount.