What is a Debit Memo in Accounting? Simple Definition, Examples and Templates
Debit Memo Definition
A debit memo, short for “debit memorandum,”
A debit memo is a financial document used to adjust or correct errors in financial transactions.
Typically, debit memos would be issued after an invoice has already been sent, to rectify any errors where the initial invoice amount was too low.
For example, ABC Ltd might sell 100 units of a product to XYZ Ltd for £20 per unit.
ABC Ltd send an invoice to XYZ Ltd for £2,000.
ABC Ltd then realise that the price per unit should have been £22, not £20, and the invoice should have been for £2,200, not £2,000.
Therefore, ABC Ltd send a debit note to XYZ Ltd for £200 (ie the difference of £2 x 100 units).
ABC Ltd have now correctly billed XYZ Ltd, and XYZ Ltd have the correct amount owed on their records too.
A debit memo is often also called a “debit note”.
Types of Debit Memos
There are typically three types of debit memo:
Debit Memos on Bank Statements
Bank fees are one reason a bank may use a debit memo to decrease an account balance.
A bank will take money out of an account for insufficient funds, overdraft fees, bank service fees among other reasons.
For example, if a business account has a £5,000 balance, and pays a £100 per year to the bank in service fees, the bank will deduct the £100 and send a debit note to the business.
Debit Memos as Internal Offsets
If a customer overpays on their account, and therefore has a small credit balance, the overpayment amount can be offset with a debit memo, effectively clearing the balance.
Common practice would be to return the funds back to the customer, but sometimes this might not be possible despite the business’s best efforts (ie if they can’t contact the customer to arrange repayment).
Debit Memos to Increase Prior Invoices
If an original invoice is sent with an amount that was too low, a debit memo may then be sent to increase the amount charged.
Why Debit Memos Are Issued
Debit memos can be issued by businesses for a couple of reasons:
Error Correction
Debit memos are primarily used to correct mistakes in previous invoices, usually where a vendor has undercharged for goods or services in an invoice.
In these cases, a debit memo is issued to correct the error by increasing the amount payable.
Billing Adjustments
Debit notes can also be used when additional services are provided, or changes are made to the initially agreed terms.
For example, a building contractor installs a new kitchen area in an office breakout area.
After the invoice is sent, the building contractor are asked to also install a new dishwasher, so a debit note is issued to effectively add on this extra charge to the initial invoice.
Debit Memo Template
A standard debit memo includes several key components such as:
Date: The date the debit memo is issued.
Debit Memo Number: A unique identifier for tracking and reference purposes.
Customer Information: Details of the customer receiving the debit, including name, address, and account information.
Seller Information: Details of the seller or service provider issuing the debit memo.
Related Invoice: If the debit memo is used to increase a previous invoice, then the related invoice number would be noted as reference.
Description: A brief description of the product or service for which the debit is being issued.
Quantity: The quantity of items involved in the transaction.
Unit Price: The price per unit of the product or service.
Total Amount: The total amount debited.
Reason: An explanation of the reason for the debit memo.