Debit memorandum

Debit memorandum (also called debit memo or debit note) is a formal accounting document used to notify a customer, vendor, or internal department that a debit has been made to their account. The document serves as written evidence that an account balance has increased or that a charge has been applied. Banks, businesses, and accounting departments use these documents extensively to maintain accurate records and provide transparent communication about financial adjustments^[1].

Definition and purpose

A debit memorandum indicates that a buyer's account owes more money or that funds have been deducted from a depositor's bank balance. The term "memorandum" reflects its function as a formal notification rather than a standard invoice. Sellers issue debit memos when they need to increase the amount a customer owes. Buyers create them when returning goods or disputing charges. Banks generate debit memos to communicate service fees, overdraft charges, or other deductions from customer accounts^[2].

The document typically includes several essential elements:

Order or reference number
Date of issuance
Reason for the debit
Names and addresses of parties involved
Description of goods or services
Amount debited
Authorized signature

Types and applications

Banking debit memos

When a bank reduces a customer's account balance for reasons other than check withdrawals or debit card transactions, it issues a debit memo. Common triggers include monthly service fees, overdraft charges, insufficient funds penalties, check printing costs, and wire transfer fees. A customer with a $5,000 balance who incurs a $20 service fee will receive a debit memo showing the new balance of $4,980^[3].

Buyer-issued debit memos

Purchasers generate debit memoranda when requesting refunds or credits from suppliers. If a shipment arrives damaged or incorrect, the buyer may return part of the order and issue a debit memo to reduce accounts payable. Consider a situation where 10% of received inventory has defects but remains usable. The buyer might issue a debit memo requesting a corresponding discount rather than returning the entire shipment.

Seller-issued debit memos

Vendors create debit memos to correct undercharges or add previously unbilled amounts. When an original invoice contained pricing errors, the seller issues a supplementary debit memo for the difference. This approach proves more practical than voiding and reissuing complete invoices^[4].

Internal debit memos

Organizations use internal debit memoranda to offset credit balances in customer accounts. When a client overpays an invoice, an internal debit memo can eliminate the resulting credit and restore the account to zero.

Accounting treatment

The journal entries for debit memoranda depend on which party issues the document. A buyer issuing a debit memo records a debit to accounts payable and a corresponding credit to purchase returns or inventory. The seller receiving this notification debits sales returns and credits accounts receivable^[5].

Bank debit memos require customers to debit bank service expense (or a similar account) and credit cash or checking account. These entries reduce the recorded cash balance to match the actual bank balance.

Comparison with credit memorandum

Debit and credit memos serve opposite functions. A debit memo increases amounts owed by the recipient, while a credit memo reduces them. Sellers issue credit memos for returns, overpayments, or billing corrections favoring customers. Both documents create auditable trails for financial adjustments and support accurate account reconciliation.

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Practical example

A manufacturing company purchases components for $10,000. Months later, the supplier increases prices by $500 due to material cost changes. Rather than issuing a new invoice, the supplier sends a debit memorandum for $500. The buyer then records this amount in accounts payable, increasing the total obligation to $10,500. Both parties' ledgers reflect the adjustment with proper documentation^[7].

References

Weygandt J.J., Kimmel P.D., Kieso D.E. (2019). Financial Accounting, John Wiley & Sons
Bragg S.M. (2022). Bookkeeping Essentials, AccountingTools
Wild J.J., Shaw K.W. (2021). Fundamental Accounting Principles, McGraw-Hill Education
Warren C.S., Reeve J.M., Duchac J.E. (2020). Accounting, Cengage Learning

Footnotes

<references> <ref name="fn1">[1] Definition based on standard accounting practices</ref> <ref name="fn2">[2] Common uses in business transactions</ref> <ref name="fn3">[3] Banking application example</ref> <ref name="fn4">[4] Seller adjustment procedures</ref> <ref name="fn5">[5] Journal entry requirements per GAAP</ref> <ref name="fn6">[6] Distinction from credit memoranda</ref> <ref name="fn7">[7] Practical application scenario</ref> </references>

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