What Is a Debit Memorandum?
A debit memorandum, or "debit memo," is a document that records and notifies a customer of debit adjustments made to their individual bank account. The adjustments made to the account reduce the funds in the account but are made for specific purposes and used only for adjustments outside of any normal debits. The reasons a debit memorandum would be issued relate to bank fees, undercharged invoices, or rectifying accidental positive balances in an account. The opposite of a debit memorandum is a credit memorandum.
- A debit memorandum is a notification to a customer that a debit adjustment has been made to their account, reducing the value of funds available.
- The three primary reasons to issue a debit memo is for bank transactions, incremental billing, or internal offsets.
- Bank transactions are related to any fees or service charges, incremental billing is when a client was undercharged by accident, and internal offsets are for offsetting any positive balances.
- Debit memorandums are not issued for normal debit transactions on an account, such as cashing a check or the use of a debit card.
Understanding a Debit Memorandum
A debit memo is issued for three general cases: a reduction in a bank customer's account balance due to fees and other related charges, under-billing of goods or services from a seller to a buyer, or an internal offset to a minor credit balance in a customer account. These types of situations are typically referred to as bank transactions, incremental billing, and internal offsets, respectively.
In retail banking, a debit memorandum is given to an account holder indicating that an account balance has been decreased as a result of a reason other than a cash withdrawal, a cashed check, or use of a debit card. Debit memos can arise as a result of bank service charges, bounced check fees, or charges for printing more checks. The memos are typically sent out to bank customers along with their monthly bank statements and the debit memorandum is noted by a negative sign next to the charge.
In business-to-business transactions, a debit memo is issued as an adjustment procedure following an inadvertent under-billing of goods or services provided to a customer. It is intended to correct a billing error. In formal parlance, it is notifying a customer that the debit memorandum will be increasing their accounts payable. For instance, if ABC Co. fills an order for XYZ Inc. and invoices the customer in an amount that is short of the agreed amount, ABC Co. will issue a debit memo to XYZ Inc. to indicate and explain the balance due.
Within a firm, a debit memo can be created to offset a credit balance that exists in a customer account. If a customer pays more than an invoiced amount, intentionally or not, the firm can choose to issue a debit memo to offset the credit to eliminate the positive balance. If the credit balance is considered material, the company would most likely issue a refund to the customer instead of creating a debit memo.