What it means
Invoices record the original transaction, but transactions do not always go to plan. Goods arrive damaged or short, prices are misquoted, services are under-billed, banks deduct charges.
Rather than cancel and reissue invoices, businesses record these adjustments with memos: a credit memo when the adjustment reduces what the customer owes, a debit memo when it increases what the customer owes or, from the buyer's side, reduces what the buyer will pay. The name refers to the accounting effect on the recipient's account in the issuer's books: a debit memo issued by a seller debits the customer's receivable account, increasing it; a debit memo issued by a buyer debits the supplier's payable account, reducing it.
The buyer's debit memo is the most common in practice. When a company receives 1,000 units and 80 are damaged and returned, or the invoice charges $50 a unit when the contract says $48, the purchasing or accounts payable team raises a debit memo to the supplier for the difference and pays the invoice less that amount.
The memo states the invoice it relates to, the reason, the quantity and price, and any tax adjustment, and it is sent to the supplier, who is expected to respond with a matching credit note. Until the supplier's credit note arrives, the memo is the buyer's record that it has reduced the payable, and the two documents are matched at reconciliation.
The seller's debit memo addresses under-billing. If an invoice was raised at the wrong rate, omitted a delivery charge, or did not include an agreed price adjustment, the seller issues a debit memo for the additional amount rather than a new invoice, so that the customer's records tie the charge back to the original transaction.
Interest on late payment and penalties under a contract are also commonly charged by debit memo. In some tax regimes, a debit note is a formal tax document that must carry the same information as an invoice, and it adjusts the seller's output tax and the buyer's input tax in the period it is issued.
The bank's debit memo is a notification rather than a request. When a bank deducts charges, returns a customer's cheque for insufficient funds, or reverses a deposit, it issues a debit memo, often as an entry on the statement described as such.
The company records the deduction when it receives the memo, which is one reason bank reconciliations find items on the statement that are not yet in the ledger. Debit memos from a bank should be checked against the account's agreed charges, because errors and unexpected fees are found this way.
Debit memos need controls precisely because they adjust amounts outside the invoice process. A buyer's team that raises debit memos freely, without evidence of the shortage or return, creates disputes with suppliers and unreconciled balances on both sides.
Good practice requires a memo to reference the invoice and the goods receipt or return record, to be raised within a set time of the delivery, to be approved at a level appropriate to its value, and to be acknowledged by the supplier. On the seller's side, a debit memo to a customer should be approved by someone other than the person who raised the original invoice, and the customer should be told why it has been issued before it appears on a statement.
In practice
Real-world examples.
Example
A retailer raises a debit memo to a supplier for $3,200 of promotional allowances agreed in the trading terms but not deducted on the invoice, and pays the invoice net.
Example
A freight company issues a debit memo to a customer for $850 of waiting time charges that were not on the original invoice because the driver's timesheet arrived after billing.
Example
A bank issues a debit memo of $25 for a returned direct debit, which the company disputes because the account was in funds, and the bank reverses it.
Think of it
“A debit memo increases what a customer owes-issued for additional charges or corrections.
Formula
Calculation
Debit memo amount = Quantity affected x Unit price (plus sales tax at the applicable rate)
Adjusted amount payable = Original invoice minus Buyer's debit memo
Adjusted amount receivable = Original invoice plus Seller's debit memo
Worked example: buyer's debit memo. A company receives an invoice for 1,000 units at $48 each: $48,000 plus 10% sales tax of $4,800, total $52,800. On inspection 80 units are damaged and returned, and 20 units are missing from the delivery.
- Units to adjust = 80 + 20 = 100
- Debit memo = 100 x $48 = $4,800, plus tax $480, total $5,280
- Adjusted payable = $52,800 minus $5,280 = $47,520
- Entries in the buyer's books: debit accounts payable $5,280; credit inventory $4,800; credit sales tax recoverable $480
Worked example: seller's debit memo. A supplier invoiced 5,000 units at $48 when the contract rate was $52.
- Under-billing = 5,000 x ($52 minus $48) = $20,000, plus tax $2,000, total $22,000
- Debit memo issued to the customer for $22,000, referencing the original invoice
- Entries in the seller's books: debit accounts receivable $22,000; credit revenue $20,000; credit sales tax payable $2,000
Worked example: bank debit memo. The bank's statement shows a debit memo for $340 of quarterly charges and another for a customer's returned cheque of $12,500.
- Entries in the company's books: debit bank charges $340; debit accounts receivable (the customer whose cheque bounced) $12,500; credit bank $12,840
- The customer is contacted for replacement payment, and the $12,500 is treated as overdueCase study
Seen in the real world.
A manufacturer's accounts payable team had the authority to raise debit memos to suppliers for shortages, damage and price differences, and used it freely: about 1,400 memos a year averaging $430 each, around $600,000 in total. Suppliers frequently disputed them, and because nobody reconciled supplier statements, the disputes sat unresolved. By the time the auditors looked, there were $600,000 of debit memos on the payables ledger that suppliers had not accepted, and the company's payables were understated by whatever part of that turned out to be invalid.
The audit tested a sample and found that about 35% of the memos, some $210,000, could not be supported: in most cases the goods had in fact been received in full and the memo had been raised because the goods receipt note was keyed late, or a price difference reflected an agreed increase that purchasing had not communicated. Suppliers had been right to dispute them, and the company had been short-paying its suppliers on the strength of its own errors. Several suppliers had quietly tightened terms or built the expected short payment into their prices.
The process was rebuilt. A debit memo could only be raised against a goods receipt note showing the shortage or a returns note showing the goods sent back, and only within five working days of delivery. Price difference memos required purchasing's confirmation of the contract price.
Memos above $1,000 needed a manager's approval. Every memo was sent to the supplier with the evidence and required an acknowledgement, and supplier statements were reconciled monthly so that unacknowledged memos were chased or reversed. The invalid $210,000 was paid, with an apology.
Within a year the number of memos had fallen by half, disputes by 80%, and two key suppliers had restored the company's original terms. The controller's summary was that a debit memo is a claim against someone else's money and should be raised with the same evidence the company would demand if the claim were against its own.
Watch out
Common mistakes.
- Raising debit memos to suppliers without evidence of the shortage, return or price error, which creates disputes, unreconciled balances and, when the memo is wrong, an understated payable.
- Confusing the direction: a buyer's debit memo reduces what the buyer pays; a seller's debit memo increases what the customer owes. The name refers to the entry in the issuer's books, not to who ends up paying more.
- Leaving debit memos unmatched against the supplier's credit notes, so that the two parties' records diverge and the difference surfaces only at audit or when the supplier stops supplying.
Questions
People also ask.
What is the difference between a debit memo and a credit memo?
A credit memo reduces the amount the recipient owes the issuer; a debit memo increases it. A seller sends a credit memo for a refund and a debit memo for an extra charge; a buyer sends a debit memo to reduce what it will pay a supplier, and expects a credit memo in return.
Is a debit memo the same as an invoice?
No. An invoice records the original sale; a debit memo adjusts it. In some tax systems a debit note is a formal document with the same content requirements as an invoice, and it adjusts the tax accounts of both parties.
What should a debit memo contain?
The original invoice number, the reason for the adjustment, the quantities and prices involved, the tax adjustment, the date, an authorisation, and a reference to the supporting document such as a returns note or goods receipt note.
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