What it means
The name confuses people because the word debit means opposite things depending on whose books you are looking at. From the bank's point of view it is debiting the customer's account, which reduces what the bank owes that customer, and from the customer's point of view their own cash balance falls.
Debit memoranda matter because they are the classic source of unrecorded differences in a bank reconciliation. The business does not know about the charge until the statement arrives, so its cash book shows a higher balance than the bank does until the adjustment is posted.
Typical items include monthly account maintenance fees, wire transfer charges, cheques returned for insufficient funds, foreign exchange charges and interest on an overdraft. Each requires a journal entry that reduces cash and records the appropriate expense or reinstates a receivable.
The term is also used between trading businesses rather than banks. A buyer may issue a debit memorandum to a supplier to record that the amount owed has been reduced because goods were returned or an invoice was overcharged.
The practical discipline is to clear every debit memorandum promptly rather than at year end. Left unposted, these small charges accumulate into a reconciliation difference that takes far longer to unpick than it would have taken to record each item on the day.
In practice
Real-world examples.
Example
A wholesaler receives a bank statement showing a $2,400 debit memorandum for a customer cheque that bounced. The accounts team reverses the original cash receipt, reinstates the receivable and puts the account on hold pending a cleared payment.
Example
A consultancy notices a monthly $45 debit memorandum for an account package it no longer needs. Switching to a simpler account saves $540 a year, which nobody had spotted because the charge never appeared as an invoice.
Example
A manufacturer issues a debit memorandum to a supplier for $1,080 after receiving damaged goods. The supplier acknowledges it and the amount is offset against the next payment run rather than being refunded separately.
Formula
Calculation
Adjusted book balance = book balance - debit memoranda + credit memoranda
A trading company's cash book shows a balance of $84,600 at month end. The bank statement includes the following items the company had not recorded.
Debit memoranda:
Monthly account service charge: $45
Fee for a cheque returned unpaid: $30
Customer cheque returned for insufficient funds: $2,400
Total debit memoranda: $45 + $30 + $2,400 = $2,475
Credit memorandum: a customer note collected by the bank of $1,500 plus $60 of interest, totalling $1,560.
Adjusted book balance: $84,600 - $2,475 + $1,560 = $83,685
The $2,400 returned cheque is not an expense. It is posted back to accounts receivable, because the customer still owes the money and now owes the $30 fee as well if the company chooses to pass it on.Case study
Seen in the real world.
Fenwick Marine Supplies is a fictional, illustrative chandlery whose bank reconciliation carried an unexplained difference of $3,180 that had been rolled forward for eleven months. Each month the bookkeeper added the new gap to the old one and moved on.
An external accountant traced the difference to 14 separate debit memoranda: routine service charges, three international payment fees and two returned customer cheques totalling $2,650. None had ever been posted to the cash book.
In this illustrative case the reconciliation was cleared in one afternoon once the memoranda were identified, and one of the returned cheques led to a customer being chased who had been quietly unpaid for nine months. Fenwick then set a rule that bank charges are posted weekly, which stopped the problem recurring.
Watch out
Common mistakes.
- Recording a returned customer cheque as a bank expense. The amount belongs back in accounts receivable, because the customer still owes the money.
- Ignoring small charges because they seem immaterial. A handful of unposted memoranda every month becomes a reconciliation difference that takes hours to investigate later.
- Confusing a debit memorandum with a credit note issued by a supplier. A debit memorandum is issued by the party reducing what it owes or reducing an account, not by the party being charged.
Questions
People also ask.
What is the difference between a debit memorandum and a credit memorandum?
A debit memorandum records a reduction in the account balance, while a credit memorandum records an increase such as interest earned or a collection made by the bank.
Does a debit memorandum always mean an expense?
No, it depends on the underlying item, since a bank fee is an expense but a returned cheque restores a receivable instead.
Where does a debit memorandum appear in a bank reconciliation?
On the book side, because the bank already knows about the item and the company's own records do not yet reflect it.
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