Credit and debit memos are documents or items on financial statements that add to (in the case of a credit) or reduce (in the case of a debit) your account balance. They are used to correct charge mistakes or any changes in the amount you owe or the amount due to you.
When reading bank statements, as well as invoices from vendors, you may see these two terms and want to know more about what they are and why they are important.
What Is a Credit Memo?
There are a few places you may see what’s called a credit memo: on an invoice from a vendor, on your bank statement, or on your credit card statement. No matter where you see the credit memo, it signifies the same thing.
A credit memo is shown when money is added to an account. In the case of a bank or credit card statement, you might see a credit memo if you were reimbursed for fees or earned interest on a bank account. With a vendor invoice, you might see a credit memo if you were overcharged on a previous invoice and are now receiving credit for that amount you overpaid.
Credit Memo Examples
These examples can help you identify them when you see them.
Bank Account and Credit Card Statement Credit Memos
• Interest earned
• Fees reimbursed
• Reimbursement of unauthorized transaction
• Credit for returned product purchase
Vendor Invoice Credit Memos
• Correction of invoice error
• Credit for overpayment
• Discount for paying invoice early
Recommended: Business vs Personal Checking Account: What’s the Difference?
What Is a Debit Memo?
In contrast, a debit memo, also called a debit memorandum, decreases the amount of money in an account.
For bank and credit card statements, that might be a fee or interest charged. For vendor invoices, the debit memo might happen when you are charged a late fee for an unpaid invoice.
It’s important to understand the difference between a credit memo vs. debit memo because the amount of money you have in your business bank account (or the amount you owe on a credit card or vendor invoice) will be impacted, as will your accounts payable.
Recommended: Small Business Financial Ratios
Debit Memo Examples
Now, consider these debit memo examples.
Bank Account and Credit Card Statement Debit Memos
• Monthly account fee
• Credit card interest charges
• Annual credit card fee
Vendor Invoice Debit Memos
• Fee for late payment
• Reconciliation for undercharging on previous invoice
Information Found on a Credit Memorandum
In addition to showing the amount credited, a credit memo may also have the following details. If you’re keeping statements, it can be helpful to know what to look for to find a particular credit memorandum.
• Payment terms
• Invoice number
• Description of item(s) purchased
• Price paid or owed
• Details on credit
• Number of items on the purchase order
• Date of purchase
• Customer’s bank account number
• Financial institution number
• Shipping address
For a bank or credit card statement, you will find the date of the credit issued, a description of the credit, and the amount.
Recommended: Variable Costing Income Statement
Information Found on a Debit Memorandum
The same information can be found on a debit memorandum, though, of course, you’ll find details on the debit, rather than the credit.
• Payment terms
• Invoice number
• Description of item(s) purchased
• Price paid or owed
• Details on debit
• Number of items on the purchase order
• Date of purchase
• Customer’s bank account number
• Financial institution number
• Shipping address
For a bank or credit card statement, you will find the date of the debit charge, a description of the debit, and the amount.
Recommended: Commercial Equity Line of Credit
When Are Credit Memos and Debit Memos Used?
There are a few scenarios where you, a bank, a credit card company, or a vendor may use a credit or debit memo.
The first is to correct an error. If you were overcharged (or undercharged) on an invoice, or if the amount owed otherwise included an error in calculation, the easiest way to rectify this error is by issuing a credit or debit memo on the next invoice.
If a customer wants to return a product or get a refund, a credit memo may be issued. Note that a credit memo isn’t the same as a refund. With a refund, the original transaction is typically reversed, where with a credit memo, a separate transaction is conducted to credit the amount owed.
Another situation where a credit memo may be used is when a customer is given a discount for a purchase. Maybe you paid an invoice early and got a credit for a percentage of the invoice amount. Or maybe the product was on sale or you purchased in bulk and got a discount through a credit memo.
With a debit memo, you may be charged a fee, such as for a late payment, an overdraft, or simply a monthly fee for a bank account.
Recommended: EBITAR Explained
The Takeaway
Understanding both credit memos and debit memos can help you more easily interpret bank and credit card statements, as well as vendor invoices. This helps you better manage your business finances.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
Is a debit memo positive or negative?
A debit memo, in the case of a vendor invoice or credit card statement, increases the amount owed. In the case of a bank statement, it’s a reduction in the amount of money in the account.
Is the credit memo a refund?
A credit memo is similar to a refund, but not the same thing. Rather than reversing the initial charge, a credit is given as a separate transaction for whatever athe same amount as the original purchase.
Why is it called a credit memo?
A credit memo provides a credit, or increase, in the amount of money in an account.
Photo credit: iStock/Inside Creative House
SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOSB0324008
