Clerical errors may exist in every organization. These errors can be critical if not rectified on time. However, companies have various tools to allow them to identify and correct errors. One of these includes the debit memo. A debit memo is the opposite of a credit memo. However, it is crucial to understand it in detail to know how it works.
What is a Debit Memo?
A debit memo is a record or document that allows companies to increase the amount of an already issued invoice. Essentially, it helps companies add items to an invoice that accountants may have missed due to clerical errors. Consequently, a debit memo also increases the amount owed by a customer since it adds additional items to an invoice.
A debit memo includes the invoice for which the company wants to increase the amount. Each debit memo contains a reference to the invoice number that it modifies. However, it does not act as an invoice on its own. Therefore, companies cannot use debit memos to sell new goods or products. For those cases, companies must use a new invoice.
Companies may also use a debit memo internally. It happens when a customer has a minimum credit balance on their account. Although rare, these situations can occur when customers pay more than what they receive and forego the remaining balance. Sometimes, it may also happen due to clerical errors. In those cases, companies use a debit memo to offset the account.
What is a Debit Memo in banking?
A debit memo is also prevalent in the banking sector. In that case, the purpose may differ from when companies use it. In banking, a debit memo is a charge to an account. Essentially, it tells the account holder that the bank has debited their bank account for a specific amount. For the customer, it is a reduction in their balance. On the other hand, it constitutes an income for the bank.
In most cases, debit memos come from bank service fees, cheque printing fees, bounced checks, etc. Banks usually send these to customers as a part of or along with the monthly bank statements. The debit memo includes a minus sign with the fee on those statements. Companies use the information from the debit memo to update their records accordingly.
What does a Debit Memo include?
The format for a debit memo may differ from one company to another. However, companies will include essential items to allow the customers to understand the document’s purpose. In most cases, a debit memo will consist of the following information.
- Name, address, and account number of the customer.
- Payment terms.
- Date of purchase.
- Invoice number and/or purchase order number.
- Description, units, and price of goods added to the invoice.
- Discount information, if applicable.
- A note explaining the purpose of the debit memo.
The above contains the essential information that every debit memo requires. Companies may add other elements to it according to their needs.
Conclusion
A debit memo is a written document that modifies a previously issued invoice. Unlike a credit memo, a debit memo increases the amount owed by the customer. In banking, this memo creates a charge to the account, decreasing an account balance. The format of a debit memo may differ from one company to another. However, it will always include some essential items.
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