What Is a Debit Memo and When Is It Used?

A debit memorandum, often called a debit memo, is a document sent to inform a recipient of a debit made to their account. It functions as a formal notice that an adjustment has been made, increasing the amount a customer owes or reducing the funds in an account. This document is not for routine transactions like a standard purchase, but is reserved for specific adjustments outside of normal operational dealings.

The primary function of a debit memo is to correct a financial record after an initial transaction has been recorded. For a business, this might mean notifying a customer of an increased amount due. For a bank customer, it explains a reduction in their account balance that was not initiated by a direct transaction they made.

Common Scenarios for Issuing a Debit Memo

One of the most frequent uses of a debit memo is to correct an underbilling on a previous invoice. If a seller invoices a customer but accidentally uses an outdated price or omits charges for services rendered, the seller issues a debit memo for the difference. This document formally notifies the customer that the amount they owe has increased and provides a clear reason for the adjustment.

Banks also issue debit memos to their account holders for fees and other charges the bank applies directly to the account. Examples include monthly service fees, charges for printing new checks, or penalties for a bounced check. These memos appear on a customer’s bank statement, explaining the reduction in their account balance with a description of the charge.

A buyer might also issue a debit memo to a supplier when returning damaged goods, although this is a less common scenario. The buyer issues a debit memo to state that they have debited their own accounts payable, notifying the seller they are reducing the amount they owe. This action prompts the seller to issue a corresponding credit memo to acknowledge the return.

Information Included on a Debit Memo

To be effective and clear, a debit memo must contain specific information, functioning as a formal and auditable document. It must be clearly titled “Debit Memo” or “Debit Memorandum” and include:

• A unique identification number, similar to an invoice number, which allows for easy tracking and reference.
• The date of issuance to establish the timing of the transaction adjustment.
• The full legal names and addresses of both the party issuing the memo and the party receiving it.
• A clear and concise explanation for the debit, such as “Correction for undercharge on Invoice #12345.”
• A reference to the original invoice number that is being corrected to provide a clear audit trail for both parties.
• The exact amount of the debit, which represents the value of the adjustment being made to the recipient’s account.

The Debit Memo Accounting Process

When a debit memo is issued, it triggers specific accounting entries for both the sender and the receiver to ensure their financial records remain accurate. The entries reflect the increase in what is owed or the reduction in an account balance.

For the issuer, such as a seller who has undercharged a customer, the debit memo increases the amount of money they expect to receive. The accounting entry involves debiting the Accounts Receivable account, which increases this asset on the balance sheet. The seller would credit a revenue account, such as Sales Revenue, to recognize the additional income earned but not previously billed.

For the recipient of the debit memo, the accounting entry reflects an increase in their obligations or expenses. A buyer who was undercharged would debit an expense account or an asset account, like Inventory, depending on the nature of the original purchase. They would then credit their Accounts Payable account. This credit increases their liabilities, showing that they now owe more money to the seller.