In simple word Credit Memo is used to reduce the balance due for a transaction , Debits Memo that we assign to a customer to collect additional charges like freight charges, taxes or finance charges.

Credit memo to Decrease  and Debit memo to Increase our receivable.

DEBIT MEMO   In AR , Debit memo is issued to a customer to increase his liability. For example , if the customer was not charged with freight charges and we need to add them to his liability, as we can’t prepare one more invoice for the freight charges. We prepare a debit memo.

Debit memo information is stored in RA_CUSTOMER_TRX_ALL, the type of transaction a particular row represents can be found out from the field class of  AR_PAYMENT_SCHEDULES_ALL by linking the CUSTOMER_TRX_ID field in the two tables.

Debit memo is usually not linked to any other Invoice like credit memos; the whole idea behind creating a debit memo is to increase the customer outstanding balance.

CREDIT MEMO   Credit memo is issued when the customer is over invoiced, that customer ‘s charged more than what customer should have been charged. Credit Memos with negative amount are typically used for crediting the customer’s account with some balance. Credit memo information is also stored in  RA_CUSTOMER_TRX_ALL

Credit memo can be created in two different ways;  the idea behind creating a credit memo is to reduce the customer invoice balance.

Example of scenario in which a Credit Memo is created
Say you have created an invoice of $5000 for a customer ABC and have sent it across. Later upon receiving the goods, customer realized one of them worth $1000 is defective and had to return it. We have already issued an invoice of $5000 but now we are supposed to charge them only $4000 because of the refund of $1000 for the defective piece. In such a situation, we create a credit memo of $1000 and apply to the invoice of $5000 to bring down its balance to $4000. We again send the credit Memo note to the customer to let them know that they have to pay us only $4000.

Credit Memo can be created in two ways

1. Manually creating a credit memo like any other AR manual invoice.

•  Invoice Class: Credit Memo
•  Invoice Type: OM Credit Memo, Credit Memo

2. Querying an existing AR Invoice and calling the Credit function from Actions menu
    Query the AR Invoice for which you want to create a credit memo

• Click on “Actions menu”
• Specify the “Reason for Credit Memo”
• Enter the Line % for Credit memo (Eg: 25% entered)
• Enter the Tax % for Credit memo (Eg: 10% entered)
• Click the Save button