A customer who paid in advance for a service wants to cancel. How should the business owner record applying that money to a future service?

The correct method for recording the advance payment from a customer who wants to cancel and instead apply that payment to a future service is to use a credit memo.

A credit memo is a document that reduces the amount owed by a customer. It essentially acknowledges that the customer has already paid for a service that they will not use at this time, and it indicates that the value of that payment can now be applied to a future service. This allows the business to keep track of the customer’s balance while properly recognizing the change in their service requirements.

Using a credit memo also provides a clear and documented way to communicate to both the customer and the business accounting system that the original transaction is being amended. This is especially important for maintaining accurate financial records, ensuring the customer’s account reflects their new balance accurately.

Other options, such as an invoice or sales receipt, are intended for new sales transactions rather than adjustments to existing ones. A refund would imply that the business is returning cash to the customer, which does not align with the scenario of the customer wanting to apply the payment toward future services. Thus, the credit memo effectively meets the need for changing the application of the previously made payment.