A debit memorandum, or debit memo, is a notice informing customers about a decrease in the balance of their account that needs correction.
A debit memo is used to inform you about an adjustment rather than a typical transaction. Learn more about what debit memos are and how they compare to credit memorandums.
Definition and Examples of a Debit Memorandum
A debit memorandum is an accounting term referring to an entry that serves as a notice to customers about a change or adjustment to their account that decreases the balance.
- Alternate names: Debit memo, debit note
A debit memo is common in the banking industry in several situations. For example, a bank may issue a debit memo when it assesses fees. The fee will be debited (or deducted) from the customer’s account and recorded as a debit memorandum to indicate that it is an adjustment rather than a transaction. A debit memo may also be used when adjusting an incorrect account balance.
Common debit memos include returned check fees, insufficient funds fees, interest fees, fees for printing checks, bank equipment rental fees, and adjustments to incorrect deposits.
Debit memos can also be used in invoicing, such as when debt that was previously written off is recovered. A debit memo in that case replaces the original invoice.
How a Debit Memorandum Works
In banking, fees are automatically taken out of an account and the debit memorandum is noted on its bank statement.
For example, if your business has $10,000 in its checking account and the bank charges a service fee of $35, the account will be reduced by $35 to $9,965 with that reduction noted in a debit memo. You might see similar debit memos for, say, fees for bounced or printed checks.
Debit memorandums are also used in double-entry accounting to indicate an adjustment that increases a customer’s amount due.
For example, if a customer ordered and paid for $1,000 in lumber in April, and the cost of lumber when it was delivered in June increased to $1,150, a debit memo could be issued for the $150 extra cost of lumber. The supplier would add a $150 debit memo to their accounts receivable while the customer would add the extra $150 to their accounts payable.
Types of Debit Memorandums
Debit Memos on Bank Statements
Bank fees are one reason a bank may use a debit memo to decrease an account balance. A bank will take money out of an account for insufficient funds, overdraft fees, bank service fees, and check printing fees, among other reasons.
Debit Memos as Internal Offsets
When a customer pays too much, the extra can be offset with a debit memo. This allows the accounting department to clear it out by sending the memo back to the customer. If the extra amount in a customer’s account is the result of an accounting error that results in a residual balance, it can also be rectified with a debit memo.
Debit Memos in Incremental Billings
When an original invoice is sent with an amount that was too low, a debit memo may be sent with the incremental correction. This method is not commonly used because most companies reissue an invoice with the corrected amount instead.
Debit Memorandum vs. Credit Memorandum
A debit memorandum and a credit memorandum both notify customers about a change in their account status. A debit memo informs customers (or buyers) about why their account balance declined or why they owe more. Credit memos are the opposite: They note changes that increase an account balance.
|Debit Memorandum||Credit Memorandum|
|In banking, notifies of an adjustment that reduces an account balance||In banking, notifies of an increase in an account balance|
|In invoicing, increases the amount the buyer owes the seller||In invoicing, reduces the amount the buyer owes the seller|
|Buyer must remit payment under a debit memorandum||Buyer can use credit to offset future purchases|
|Buyer records the transaction as a reduction in accounts payable; seller debits accounts receivable||Seller records the credit memo as a reduction of their accounts receivable balance; customer records the credit memo as a reduction in accounts payable|
- A debit memo is used to denote an adjustment to a customer’s account that reduces their balance.
- In banking, a debit memo notifies of an adjustment that can be related to banking fees, such as service charges or bounced-check fees.
- Debit memos are often used in accounting to rectify overpayments from customers.