What is a Debit Memo? Comprehensive Guide and Example

A debit memo is issued by a seller to a customer, notifying it of an additional billing to the customer’s account. This document is useful for clarifying the nature of any corrections to an existing billing, or any additional charges or penalties being applied by the seller. 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. A debit memo reflects an increase in revenue and accounts receivable. Accurate accounting entries ensure your financial statements and, thus, reflect your company’s current financial situation. This is especially crucial in industries like retail, manufacturing, and federal contracting, where precise financial records are important to keep.

Internal offsets with debit memos

A debit memo is marked what does memo debit mean with a minus sign next to the charge and is usually included with monthly bank statements sent to customers. There can be a few different types of debit memos depending on the situation and the industry. For example, they can be common in retail banking, to fix a billing error, or to offset credit. Keep reading for a further breakdown of some of the most common types of debit memos. On top of a monthly account service fee, you might also see a debit memo occur due to a printed or bounced check, for example.

The memos typically are shown on bank customers’ monthly bank statements; the debit memorandum is noted by a negative sign next to the charge. The reasons a debit memorandum may be issued relate to bank fees, incorrectly prepared invoices where the amount owed should be greater, and rectifying accidental positive balances in an account. When this happens, the fees work as more of an adjustment instead of a specific transaction. Then, it gets debited from your account and is then recorded as a debit memo.

1. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
2. For a Force Pay memo debit fund authorization, customers are expected to pay and ensure that the debit memo goes through before any goods or services are released.
3. It gets created and then sent off to a supplier that also includes a note that explains what it’s for.
4. Of the usages noted here, bank transactions represent the most common usage of debit memos.

Debit memos for additional billing

Billing customers isn’t always a smooth process, and things can change after the job is complete. Learn how to use a debit memo to adjust invoices after they’re sent. When an original invoice is sent with an amount that was too low, a debit memo may be sent with the incremental correction.

When an account balance gets reduced for a cause other than a cash withdrawal a debit memorandum is given to the account holder in retail banking. Debit memos may result from bank service fees, fines for returned checks, or fees for printing additional checks. The debit memo gets indicated by a minus sign next to the charge, and it is typically sent to bank customers with their monthly bank statements. A bank creates a debit memo when it charges a company a fee on its bank statement, thereby reducing the balance in the company’s checking account. Thus, if a bank account has a balance of $1,000 and the bank charges a service fee of $50 with a debit memo, the account then has a remaining balance of $950.

In either of these cases, the buyer has the right to return the damaged or incorrect inventory for a full refund. Debit memorandums are also used in double-entry accounting to indicate an adjustment that increases a customer’s amount due. Let’s get into the details and understand its role, best practices, types, and importance in financial transactions. They can also get used for incremental billing and internal offsets. No matter what the memo gets used for, there are a few elements that should always get included.

FAQs on Debit Memo

It represents an adjustment to an account that reduces a customer’s balance. Imagine you write an invoice and send it to a customer, only to realize that you forgot to include a few materials or hours of labor. For instance, the damaged inventory might only be 10 percent damaged and still in usable condition.

When to Create a Debit Memo

Debit memos act as a correction tool in business-to-business transactions when a customer is inadvertently undercharged. This adjustment is meant to address billing errors by formally notifying the customer of an increase in their accounts payable. After getting familiar with when businesses issue debit memos, let’s understand the different types of debit memos. Here are some primary reasons that prompt businesses to issue debit memos for adjusting financial accounts. Debit memos are a common phenomenon in the banking and finance sectors. When a bank charges a fee, it often issues a debit memo to the affected bank account.