What does receiving a credit memo from the supplier indicate?

Receiving a credit memo from the supplier signals that the company is reducing the balance of the account. This reduction may occur for several reasons, including adjustments for returned merchandise, pricing errors, or promotions. A credit memo serves as documentation from the supplier indicating that the total amount owed by the company has been decreased, which is essential for maintaining accurate accounts payable records.

While the option of receiving free products, returning products for credit, or settling an account may relate to situations involving a credit memo, these choices are more specific scenarios. The primary and broad interpretation is that a credit memo signifies an adjustment to the account balance, making it a fundamental transactional document in accounting practices.