Table of Contents
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 record certain changes in the amount you owe or the amount due to you.
When you’re reviewing bank statements or invoices from vendors, you may see these two terms and want to know more about what they are and why they are important.
Key Points
• Credit and debit memos are financial documents that either increase or decrease account balances, serving as adjustments to previously recorded transactions.
• Credit memos may reflect reimbursements for returned goods, discounts or rebates, or corrections for billing errors.
• Debit memos reduce account balances by recording fees, interest charges, late payment penalties, or adjustments for underbilling.
• Bank reconciliation requires businesses to update their financial records when debit or credit memos appear, ensuring agreement between bank and internal accounts.
What Is a Credit Memo?
You may see a credit memo (also known as a credit memorandum) 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’re being 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 the amount you overpaid.
Use Cases
A common use case for a credit card memo is tracking a business expense for a purchase you have returned. For example, let’s say a small business owner purchases office supplies using a company credit card. In the memo field, they write “Office supplies for Q3” to clearly note the purpose of the purchase. If the business owner returns the office supplies, they’ll see a credit on their account for the purchase price. This will be a new line item on their ledger, as opposed to the charge just disappearing.
Information Found on a Credit Memorandum
In addition to showing the amount credited, a credit memo may also have a variety of details about the credit, depending on the issuer and type of credit. Information that may be on the memo can include:
• Credit memo reference number
• Issuer’s name and contact info
• Recipient’s name and contact info
• Original invoice number
• List and description of item(s) purchased
• Price paid or owed
• Details on reason for credit
• Payment information
• Financial institution number
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: Accounts Receivable Financing
Bank Account and Credit Card Statement Credit Memos
A credit memo on a bank account or credit card statement indicates a positive adjustment. It reduces the amount owed by the customer, often due to returns, billing errors, or overpayments. Reasons for credit memos may include:
• Fees reimbursed
• Reimbursement of unauthorized transaction
• Credit for returned product purchase
Vendor Invoice Credit Memos
A vendor invoice credit memo is issued by a supplier to adjust or reduce the amount owed by a customer. It may address:
• Correction of invoice error
• Credit for overpayment
• Discount for paying invoice early
What Is a Debit Memo?
In contrast to a credit memo, a debit memo, also called a debit memorandum, decreases the amount of money in an account.
What is a debit memo used for? For bank and credit card statements, it might be caused by a fee or interest charged. For vendor invoices, the debit memo might appear when you’re charged a late fee for an unpaid invoice.
It’s important to understand the difference between a credit memo vs. a 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: Accounts Payable vs. Accounts Receivable
Use Cases
One common use case for a debit memo can occur when a buyer receives damaged goods from a supplier or fewer goods than appear on the invoice. The buyer can issue a debit memo to address the problem, and the seller can make the appropriate changes to its accounting documents.
There are also cases in which the seller can issue debit memos, as we’ll discuss below.
Information Found on a Debit Memorandum
Similar information can be found on a debit memorandum as on a credit memorandum, though, of course, you’ll find details on a debit, rather than a credit, including:
• Debit memo reference number
• Issuer’s name and contact info
• Recipient’s name and contact info
• Original invoice number
• List and description of item(s) purchased
• Price paid or owed
• Details on reason for debit
• Debit information
• Customer’s bank account number
• Financial institution number
For a bank or credit card statement, you will find the date of the debit charge, a description of the debit, and the amount.
Bank Account and Credit Card Statement Debit Memos
A debit memo on a bank account or credit card statement indicates a charge or deduction. This can occur due to transactions like fees, withdrawals, or adjustments for billing errors. Debit memos increase the amount owed or reduce the account balance. Reasons for bank account and credit card statement debit memos can include:
• Monthly account fees
• Credit card interest charges
• Annual credit card fees
Vendor Invoice Debit Memos
A vendor invoice debit memo is issued by the seller to indicate an increase in the amount owed to it. It may include elements like:
• Fees for late payment
• Costs for services not on the original invoice
• Reconciliation for undercharging on a previous invoice
Recommended: Invoice Financing
Key Differences Between a Credit Memo vs Debit Memo
Here are the key differences between a credit memo and a debit memo:
• Purpose:
◦ Credit Memo: Reduces the amount owed by the customer
◦ Debit Memo: Increases the amount owed by the customer
• Usage:
◦ Credit Memo: Issued for refunds, returns, overpayments, or billing errors
◦ Debit Memo: Issued for underbilling, missed charges, or additional services
• Effect on Account Balance:
◦ Credit Memo: Decreases the account balance for the business or creates a credit
◦ Debit Memo: Increases the account balance for the business or adds to the amount due
• Financial Direction:
◦ Credit Memo: Reflects a credit to the buyer’s account
◦ Debit Memo: Reflects a debit to the buyer’s account
How Memos Affect Bank Reconciliation
A bank reconciliation is a process that businesses engage in to compare their recent financial records with those of the bank they use. Businesses can generally get a bank reconciliation statement regularly from the bank they use. This statement summarizes recent account activity as recorded by the bank. Comparing it against a business’s records can help the business spot discrepancies and make sure the two accounts are aligned.
Here’s how it works. If a debit memo or credit memo appears on the bank reconciliation statement you receive from the bank, you’ll need to make sure that amount is accounted for in your own financial records. These memos indicate that the bank has already added or subtracted these amounts from your account, so for accuracy, you’ll have to update your records, too.
Recommended: Invoice FInancing vs. Invoice Factoring
When Are Credit Memos and Debit Memos Used?
There are several scenarios in which 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 funds are typically returned to the customer, often in the same way they were paid. With a credit memo, a separate transaction is conducted to credit the amount owed to the customer’s account.
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.
When you see a debit memo, you may have been charged a fee, such as for a late payment or an overdraft fee for a bank account.
What Is a Memo Created by NSF Support?
If you see a memo created by NSF support (or otherwise relating to NSF), it generally refers to fees associated with a payment you attempted to make that was returned for nonsufficient funds. Banks typically charge fees when your funds don’t cover a check or ACH transaction and they refuse to process it. (Some banks may decide to cover the charge, but in that case they will likely charge you an overdraft fee.)
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 can equip you to better manage your business finances.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business 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 it’s not exactly the same thing. Rather than getting back the original payment, the customer gets a credit for the relevant amount on their account.
Why is it called a credit memo?
A credit memo provides a credit, or increase, to the amount of money in an account.
Who issues a credit memo or debit memo?
Credit and debit memos are most commonly issued by banks, credit card issuers, or vendors. In some cases, a company may be able to issue a debit memo or credit memo – when returning purchased goods, for instance, or correcting an overcharge on an earlier invoice.
How do debit and credit memos affect accounts receivable?
Debit memos show a reduction in your accounts receivable, and credit memos show an increase in your accounts receivable.
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