What is the purpose of a credit memo in QuickBooks?

The purpose of a credit memo in QuickBooks is primarily to record a return or refund to a customer. When a customer returns a product or when there is an adjustment to a previous sale, a credit memo allows the business to formally document this transaction. By issuing a credit memo, QuickBooks automatically adjusts the customer’s account balance, reflecting the amount to be credited back to the customer, and it updates inventory records if applicable.

In contrast to the other choices, a credit memo does not apply discounts to future invoices, increase product inventory counts, or serve as a vehicle for reporting financial losses. Instead, its specific function is centered around providing a mechanism for handling returns or refunds, which is essential for maintaining accurate accounting records and fostering good customer relations.