Memorandum in Accounting

When entering an item into the financial systems, companies must have a supporting document. In most cases, this document will differ based on the type of transaction. Once entered, companies cannot remove the entry. However, they can still reverse the impact through other journal entries. Nonetheless, the transaction will require a supporting document.

What is a Memorandum in Accounting?

A memorandum in accounting is a source document that includes a short message. This message provides the base for an accounting journal entry. Through a memo, companies can enter a transaction in the accounting system. This transaction ends up on the general ledger. When tracking that transaction, the memorandum helps understand its source.

A memorandum is a written note or document. The primary objective of this document is to provide clarity about the financial transaction. Sometimes, it can also serve as a reminder to adjust the accounts. This term may also refer to a memorandum entry in accounting. This entry does not include any amounts. However, it consists of a short message that becomes a part of the general journal and general ledger.

What are the types of Memorandum in Accounting?

A memorandum in accounting may come in three types. These include debit, credit, and general memos. Usually, the first two are more common and involve an amount. However, the general memorandum is also crucial in the accounting process. A description of each of these types is as below.

Debit memorandum

A debit memorandum is a source document used to inform customers about a decrease in their balance. However, that applies to banks only. In accounting, it refers to an entry that serves as a notice to customers about their owed amount. Usually, it also includes a source document sent to the customer. Companies adjust the balance in the customer’s account through a debit memo.

With a debit memo, companies increase the receivable balance from a customer. Usually, they use it to include items missed in an invoice. The primary objective of the debit memo is to adjust a billing error, usually under-billing. For example, a company sends a $200 invoice for $300 worth of goods to a customer. A debit memo will increase that invoice amount by $100.

Credit memorandum

A credit memorandum also applies to banking. In that case, it notifies a customer of an increase in their checking account balance. However, a credit memorandum in accounting is different. In that case, it serves as an adjustment to an invoice. It is similar to a debit memorandum in that regard. However, it decreases the invoice amount instead of increasing it.

A credit memorandum is the opposite of a debit memorandum. When companies overbill a customer, they use this memo to reduce it. It also applies to sales returns where customers return goods. For example, a company sends a $200 invoice to a customer. However, the customer returns those goods later. Therefore, the company will issue a credit memorandum for $200 to the customer.

General memorandum

A general memorandum differs significantly from the above two types. It is a document used for internal purposes only. In essence, a general memo is used for partial or incomplete transactions. It includes a short message that companies enter into the general ledger. Another name used for it is memorandum entry.

Conclusion

A memorandum in accounting is a document that includes a short message. This document serves as a source for various transactions. Usually, companies use debit or credit memorandums which adjust customer balances. However, they may also create general memos, which serve as an explanation for transactions.

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