How Do I Generate a Credit and Apply a Credit Memo?

Credit Memos operate similarly to Client Payments, reducing the outstanding amount on an invoice. However, the process to issue a Credit Memo differs.

A Credit Memo can originate as a negative Fee Line Item. This is very important. There are a few methods to accomplish this, but in most cases we suggest establishing a one-time Client Account fee that can be converted into a Credit Memo later on.

Watch this video to learn more about credit memos.

Credit memos can be generated via fees or Client Line Item Adjustments.

Learn more about Client Line Item Adjustments!

To issue a Credit Memo, please follow these steps:

Phase 1: Create a Fee

1. Navigate to Client Accounts (Location or Service Fees can also generate credits)

Go to Client Accounts in the main navigation and open the client account you want to credit.

2. Add a New Client Account Fee

Scroll down to the Client Account Fees section and click New (or New Fee if the account has no fees yet).

3. Fill in the Fee Form

Complete the form with the following settings:

Line Item Category — Select Other
Amount — Enter a negative value (e.g., -250.00 )
Header Label — Enter the label that will appear as the section header on the invoice (e.g., Credit Memo )
Label — Enter the line item description (e.g., Credit Memo )
Billing Style — Fixed
Frequency — One Time
Start Date — Set to the first day of the fiscal period the credit should appear in

Click Save to create the fee.

Phase 2: Verify in Billable Revenue

4. Open the Revenue Dashboard

Navigate to Revenue in the main navigation and select Billable Revenue. Use the fiscal period selector to navigate to the period that matches the fee's start date.

5. Confirm the Fee Appears

Click the Client Account Fees tab to verify the fee is listed for the correct client account with the correct negative amount.

Phase 3: Generate the Invoice and Convert to a Credit Memo

6. Generate a Client Invoice

From the Billable Revenue dashboard, generate an invoice for the client. The negative fee will be included as a line item.

7. Open the Invoice

Navigate to Revenue > Invoices, find the newly created invoice, and open it.

8. Click the Credit Memo Icon on the Negative Line Item

Scroll to the Line Items section of the invoice. Locate the negative Credit Memo line item. Click the credit memo icon to the right of it (tooltip: Add To Client Credit Memo).

The credit memo icon only appears on negative line items while the invoice is in Not Approved status.

9. Select "New Credit Memo" and Move the Line Item

In the modal that appears, choose New Credit Memo in the dropdown, or pick an unsent credit memo for the same client account to add this line to it. Then click Move Line Item.

A credit memo has to stay a credit overall. If a move would turn the memo into a charge, Discovery blocks it.

Discovery will create a new Credit Memo document and redirect you to it.

Whole invoice negative? If the invoice's total is negative, click Move to Credit Memo at the top of the invoice instead. Discovery moves every line to a new credit memo, removes the empty invoice and opens the new memo. This works on Not Approved or On Hold invoices in an open fiscal period.

Send the Credit Memo

A new credit memo starts as Not Sent, and you can still change its lines. When it is ready, send it from the top of the memo:

Email sends it to the client account's primary email address.
Print To Send marks it sent and opens the PDF so you can deliver it yourself.

Once sent, the memo's status is Sent and its lines are locked. Sending is also when Discovery records the accounting (see Accounting Integration below). A memo can't be sent if its fiscal period is closed. You can apply a memo to invoices before or after sending it.

Phase 4: Apply the Credit Memo to an Invoice

Note: If your tenant has the "Sync Client Invoices with QuickBooks" setting enabled (Settings → Accounting Integration), the Applied to Invoices section will not appear on the Credit Memo record. When this setting is on, Discovery creates a corresponding invoice and credit memo directly in QuickBooks Online instead of posting a journal entry. In this case, credit memo application must be completed in QuickBooks Online — not in Discovery. You can still email the credit memo to your customer from Discovery as normal.

10. Review the Credit Memo

You are now on the Credit Memo record. Review the Credit Memo Information section to confirm the document number, client account, and total amount are correct.

11. Fill in the "Applied to Invoices" Form

Scroll down to the Applied to Invoices section. Enter the following in the input row at the bottom of the table:

Invoice # — The number of the invoice you want to apply this credit to
Applied Amount — Enter a positive value for the amount to apply (e.g., 250 )
Applied Date — The date the credit is being applied

Click the + button to save the application.

Note: Voided credit memos cannot be applied to an invoice.

Discovery checks each application:

You can't apply more than the memo's remaining balance.
The invoice must belong to the same client company as the memo.
You can't apply more than a sent invoice's balance due, and you can't apply to a voided invoice.
If the invoice number isn't found, you'll see The chosen Client Invoice is invalid.

When a sent invoice's Total Due reaches $0, Discovery marks it Paid. When a sent memo's whole amount is applied, its status changes to Fully Applied. Unapplying a credit reverses both.

12. Confirm the Credit Was Recorded

After saving, the Applied to Invoices table will show the invoice number, applied amount, and date. The Applied Amount in the Credit Memo Information section will update to reflect the total applied.

13. Verify on the Target Invoice

Navigate to the invoice you applied the credit to. In the Invoice Information section, confirm:

Total Credit Memos Applied shows the credited amount
Total Due has been reduced accordingly
The Applied Payments/Credit Memos sidebar shows the credit memo entry

Accounting Integration

What Discovery records when you send a credit memo depends on your accounting setup under Settings → Accounting → Integration. If no accounting system is selected, the memo, its balance and the invoices it's applied to stay inside Discovery.

With an accounting system set up, a credit memo follows one of two paths:

Your configuration	What happens when a credit memo is sent
Sync Client Invoices With Quickbooks is on (QuickBooks Online only)	Discovery creates a matching credit memo in QuickBooks Online.
Sync Client Invoices With Quickbooks is off, and an Accounts Receivable GL Account is set	Discovery creates journal entries, which you then send to QuickBooks Online or export for QuickBooks Desktop.

QuickBooks Desktop always uses journal entries.

Either way, the accounting is recorded once, when the memo is sent by email or print. You can't send a credit memo if its fiscal period is closed.

Journal Entries

The journal entries reverse the revenue and any sales tax on the credited line items against your Accounts Receivable GL Account, the opposite of a client invoice. They may summarize several line items, so when you reconcile, compare totals rather than line counts.

If the client account is linked to a QuickBooks customer, that customer appears on the revenue side of the entries, so you can report revenue by customer in QuickBooks.

Before you start sending credit memos, make sure every fee category has a revenue GL account and every sales tax has a GL account. If one is missing, the credit memo shows an error and no entries are created. Contact support if you see this error.

To send the entries to QuickBooks Online, go to Settings → Quickbooks Online → Journal Entries and choose Send Unposted Entries To Accounting System. If QuickBooks Online rejects an entry, the reason shows on the affected lines, where you can correct the GL account and send again. For QuickBooks Desktop, generate an IIF file from Settings → Quickbooks Desktop → Accounting Exports.

Adjusting Entries

If Create Adjusting Journal Entries is enabled and the memo credits a charge from a different fiscal period, Discovery also records adjusting entries so the revenue lands in the period the charge belongs to. Set both your Accrued Revenue GL Account and Deferred Revenue GL Account for this to work.

QuickBooks Online

With Sync Client Invoices With Quickbooks enabled, sending a credit memo creates a credit memo in QuickBooks Online for the client account's linked QuickBooks customer, with the memo's document number, line items and amounts. Sales tax isn't itemized on the QuickBooks credit memo.

The QuickBooks credit memo is dated the memo's Fiscal Date. If Use Client Invoice Date When Posting is turned on in your accounting settings, it's dated the memo's Document Date instead.

While this setting is on, enter client payments in QuickBooks Online rather than in Discovery.

If QuickBooks Online can't accept the credit memo, the memo isn't sent and the client gets no email. The usual cause is a client account that isn't linked to a QuickBooks customer yet.

Applying a Credit Memo to an Invoice

Applying a credit memo to a client invoice, or unapplying it, changes balances in Discovery only. Nothing new goes to your accounting system, because the accounting was recorded when the memo was sent.

Voiding a Credit Memo

A sent credit memo can't be deleted. To correct one, void it. Voiding is permanent and only possible while the memo's fiscal period is open. What voiding does to your books depends on your setup:

QuickBooks Online sync: Discovery removes the credit memo from QuickBooks Online.
Journal entries: Discovery reverses any entries already sent to your accounting system and removes entries that haven't been sent yet.

To void, click Void at the top of the memo, enter a Reason (internal use) and click Void Credit Memo. Discovery emails the client account a notice that the memo was voided.

Voiding also unapplies the memo from every invoice it had been applied to, restoring those invoice balances. Credit memos are not refunded; voiding replaced the earlier refund option.

If you have additional questions or need more in depth information, please feel free to send us a message using the help beacon in the lower right-hand corner.