Discount vs. Credit Memo vs. Write-Off:
What's the Difference?
A discount, a credit memo, and a write-off all reduce what a client owes you, so they're easy to mix up. The difference is timing and accounting: when the adjustment happens relative to the invoice, and where it lands in your books. Here is how to tell them apart, with examples for A/E firms.
Three Ways to Reduce What a Client Owes, and Why They Aren’t Interchangeable
A discount, a credit memo, and a write-off all reduce what a client owes you, so they’re easy to mix up. The difference is timing and accounting: when the adjustment happens relative to the invoice being issued, and where it lands in your books.
The short answer
- A discount happens before an invoice is issued.
- A credit memo happens after an invoice is issued and reduces the amount due.
- A write-off happens after an invoice is issued, when you’ve decided you will never collect the remaining balance.
→ Read: Billing & Profitability for A/E Firms: The Complete Guide
The difference between a discount, a credit memo, and a write-off is timing and accounting: when the adjustment happens relative to the invoice, and where it lands in your books.
What Each One Means, With A/E Examples
Discount
A discount is applied to an invoice before it goes out. It lowers the amount you bill, so the client never sees the full amount as due.
A/E example: You agreed during a proposal meeting to take 5% off the final invoice for a repeat client. You apply the discount while preparing the invoice, and the client receives it already reduced.
Hourly not-to-exceed phases are another common case. When billings would exceed the agreed cap, a discount applied as the invoice is saved brings the total back to the limit.
→ Read: How to Bill Hourly Not-to-Exceed Contracts Without Gaming Your Own Time Records
Credit memo
A credit memo is a transaction that applies a credit to an invoice after it has been issued, which reduces the amount due. In your accounting system, a credit memo is recorded against the income account, not an expense account. It reduces your revenue instead of being treated as a cost of doing business.
A/E example: You issued an invoice that billed 40 hours on a design phase, and the client successfully disputes 6 of those hours. You issue a credit memo for the disputed amount. The invoice is still on the books, but the balance due drops.
Write-off
A write-off is an adjustment, made through a transaction on the invoice balance, that reduces the balance to zero. It’s for an issued invoice that you are never going to collect. In your accounting system, the adjustment is recorded as bad debt.
A/E example: A developer client goes out of business and still owes you $4,200 on your final invoice. You’ve exhausted your collection options, so you write off the remaining balance. The invoice closes out and the loss is recorded as bad debt.
→ Read: How to Collect Late Invoices Without Damaging Client Relationships
A credit memo is recorded against income and reduces revenue. A write-off is recorded as bad debt.
Using one where the other belongs changes what your books say about the business.
Side by Side, and Why the Distinction Matters
Why the distinction matters
Choosing the wrong one distorts your financial picture. A write-off used where a credit memo belongs makes a billing correction look like a collections failure, and shows up as bad debt in your books. A credit memo used where a write-off belongs makes uncollectible money look like a negotiated reduction in revenue.
Over time, that hides how much you’re really losing to collections problems versus billing corrections, and those two problems have very different fixes.
A billing correction and a collections failure are different problems with different fixes.
Record each one as what it is, or you lose the ability to tell them apart.
Which One to Use, and Questions That Come Up
Ask two questions
- Has the invoice been issued? If not, use a discount.
- If it has been issued, are you reducing what’s owed, or giving up on collecting it? If you’re intentionally reducing the amount the client owes, use a credit memo. If you’re closing out a balance you’ll never receive, use a write-off.
Can I apply a discount after an invoice has been issued?
Not as a discount. Once an invoice is issued, the tool for reducing what’s owed is a credit memo.
Is a credit memo the same as a refund?
No. A credit memo reduces the amount due on an invoice. A refund returns money the client has already paid.
Does a write-off mean the client no longer owes me?
A write-off removes the balance from your books as bad debt. It reflects your decision that the balance is not going to be collected, and how you handle the relationship or any further collection efforts is a separate decision.
Do credit memos and write-offs affect my revenue the same way?
No. A credit memo is recorded against your income account, while a write-off is recorded as bad debt.
A note on your accounting
How these adjustments are treated can depend on your accounting method and jurisdiction, so confirm the specifics with your CPA before setting up your process.
How BaseBuilders handles this
BaseBuilders supports all three adjustments on invoices, so your billing team can use the right one for each situation. Batch actions let you write off balances across a set of invoices at once. See the BaseBuilders Knowledge Base for the details.
→ Read: Cash Flow & AR for A/E Firms
→ Read: A/E Accounting for Architecture and Engineering Firms
→ Read: Financial Metrics for A/E Firms
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