What transaction type decreases the amount a customer owes you?

A credit memo is a document issued to a customer to reduce the amount they owe on their account. This could be due to various reasons, such as returns, allowances, or discounts. When a credit memo is applied, it effectively lowers the outstanding balance, signaling that the previous amount charged has been adjusted downward. This transaction directly decreases the receivable amount, thereby impacting the customer’s balance positively for them.

The invoice generates an amount that the customer owes; thus, it does not decrease what the customer owes. A payment indicates that the customer is reducing their balance through the act of paying off their debt; however, it reflects activity in fulfilling that obligation rather than adjusting the stated amount due. A debit note, while it may increase a customer’s liabilities, does not serve the function of decreasing what is owed; instead, it typically indicates an increase in charges or the amounts owed. Consequently, a credit memo is the specific transaction type that reduces the liability a customer has to your company.