A debit memo (also known as a debit note or debit memorandum) is a document used to notify a customer of an adjustment or correction that has been made to their account resulting in a reduction of funds. They are issued for specific situations and not normal debit transactions. Unlike credit memo, which reduces receivables, debit memo reduces the accounts payable.
What is a Debit Memo?
A debit memo is a document that can be used to reduce the amount payable to a vendor. For example, if a customer receives damaged or defective merchandise from a vendor, they may return it and issue a debit memo to recover the cost.
The debit memo reduces the accounts payable balance for that vendor’s invoice. This correction properly accounts for the returned items and lowers the amount owed to the vendor.
Some key points about using debit memos to decrease accounts payable:
- They allow customers to recoup costs for unsatisfactory vendor products.
- They enable proper accounting treatment when merchandise is sent back.
- They function as credits against the existing payable, rather than new bills.
- They should match the value of the returned products.
- Supporting documentation should accompany debit memos.
What is a Debit Memo Charge?
A debit memo charge is an amount that is deducted from a customer’s account to correct an error, apply fees, or make an adjustment. Some common reasons for debit memo charges include:
- Bank fees – Service charges, overdraft fees, bounced check fees, etc.
- Underbilling – Charging a customer less than the agreed-upon amount
- Offset credit balances – Decreasing accidental overpayments or credit balances
So debit memo charges are used by banks and businesses to recover costs or correct mistakes. The customer is notified of the deduction by a debit memo document.
Who Sends a Debit Memo?
A debit memorandum is typically sent by:
- Banks – To notify customers of account deductions like monthly maintenance fees
- Businesses – To correct underbilled invoices sent to other businesses
- Accounting departments – To offset unintended overpayments or credit balances
What are Examples of Debit Memos?
- A bank debit memo for a monthly account fee
- A utility company debit memo for services used but underbilled
- A customer refund debit memo to offset an overpayment
- A company debit memo to a vendor to correct an invoicing error
What is a Force Pay Debit Memo?
A force pay debit memo is used to ensure payment is made upfront before any goods or services are delivered. For example, a gas station may issue a force pay debit memo to authorize and force the payment before allowing a customer to pump gas. This prevents losses from drive-offs.
When to Use a Debit Memo
It should be used to:
- Cover additional unbilled costs after an invoice is sent
- Correct billing mistakes like undercharging
- Pass on increased expenses that were not included originally
- Make adjustments for other changes imposing added costs
The debit memorandum allows the correction of invoicing errors after the fact, rather than voiding and reissuing entirely new invoices. Proper authorization procedures should be followed when issuing debit memos.
In summary, a debit memo is an important accounting document for notifying customers of balance adjustments and making necessary corrections. When used appropriately, debit memos can resolve invoicing and payment inaccuracies efficiently.