When a seller issues a credit memorandum, the account that is credited is 1) Sales.
2) Sales Returns and Allowances.
3) Purchase Returns and Allowances.
4) Accounts Receivable.

Please help! I get that it's a credit memo but not sure what to credit!

Unfortunately, we are not allowed to answer homework questions. However I will try to explain it so that you can figure this out.

Let's use an example. Customer buys $100 worth of product from Seller. Seller needs to send out an invoice to Customer. Where, of those four accounts that you have listed, does the invoice get generated from?

Customer has returned $20 of product. Seller is now issuing a credit memorandum to Customer. Seller needs to offset the account that he applied the $100 sale against.

Does this help at all? Tell me what is confusing you and I will try to walk you through this so that you understand. Start with the first question I asked.

Wouldn't it be accounts receivable because he brought back $20?

Good Girl! Do you understand the reasoning behind this?

If a credit memorandum is issued to a customer, it always need to be applied toward a customer's account with the seller because the customer needs to see the credit when he receives his statement. So, it stands to reason that the credit needs to be applied toward the invoicing account.

Thanks for your help!