Table of Contents
A debit memorandum is a notice issued to customers from a bank or a business informing them of an adjustment being made to their account balance. In all cases, a debit memo means that money will be taken out of an account to cover a fee or an underpayment.
Debit memos occur both in personal banking — such as after a bounced check or for an insufficient funds fee — but are also common in business-to-business (B2B) transactions. They’re often used to correct an erroneous invoice or reflect changing market prices. Understanding how debit memos work can help you stay on top of your money.
Key Points
• A debit memorandum is a notice that funds will be withdrawn from an account to cover fees or underpayments.
• Debit memos can appear in personal banking, such as for overdraft or bounced check fees.
• Businesses use debit memos to correct invoices, increase charges, or reflect changes in costs.
• Debit memos differ from credit memos, which indicate an increase in account balance or a reduced invoice amount.
• Monitoring account activity and understanding fee structures can help avoid unexpected debit memos.
What Is a Debit Memo?
A debit memo is a notice from a financial institution or a business to a customer that there’s a forthcoming adjustment (a debit or withdrawal of funds) to their account. You may also hear it referred to as a debit memorandum or debit note.
A debit memo might show up on your bank statement for an atypical fee, such as for ordering checks or overdrafting. Normal checking account debits, such as debit card purchases or cashed checks, aren’t classified as debit memos and won’t appear on a bank statement as such.
In B2B transactions, a company may issue a debit memo after invoicing if there was something incorrect on the original invoice. Typically, this happens if the customer was undercharged.
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How Does a Debit Memorandum Work?
In banking, if you’ve incurred a fee, such as an overdraft fee, the bank will add a debit memorandum to your monthly bank statement. If you use a digital banking app, you can often see this debit note in real time — no need to wait for a paper statement in the mail.
Just make sure you’ve turned on account alerts to track deposits, withdrawals, and other important account changes.
Banks can’t just assess fees at random. Federal law requires banks to disclose any fees they might charge for a bank account. Before opening a bank account online or in person, ask to see a detailed fee structure. If you don’t think a debit memo on your bank statement is correct, contact customer service to address the issue.
In business, debit memos work a little differently. The company acting as the seller might issue a debit memo after sending an incorrect invoice. Doing so notifies the buying company that its accounts payable will increase to rectify the unpaid amount.
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Real-Life Examples of a Debit Memorandum
Here are two real-life examples of bank memos, one for regular consumer checking accounts and one for a B2B transaction.
Banking Scenario
If you write a check to a friend but don’t have enough money in your checking account to cover it, the check will bounce when your friend goes to deposit or cash it. Every time you bounce a check, your bank will likely charge you a fee. Rather than sending you an invoice, the bank will directly debit the amount from your account.
Even if you have no money in your account, you can go into a negative balance. This debit will show up on your bank statement as a debit memo.
Business Scenario
In this example, your company has done construction work for a local business. However, when sending the invoice to the business, you accidentally left off the labor cost and additional materials required for one portion of the project, equivalent to $5,000.
To resolve this problem, you can issue a debit memo to the local business. This signals that you’ll be recording an increase in your accounts receivable of $5,000. In turn, the local business will then need to increase the amount in its accounts payable by $5,000 to cover the additional fee. To avoid delays or disputes, the debit note should include adequate information to explain the adjustment in the final cost.
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Types of Debit Memos?
Three situations commonly call for debit memos: bank transactions, incremental billing, and internal offset. Here, learn about all three types of debit memos to understand their key differences.
Bank Transactions
As an individual consumer, you’ll most likely encounter a debit memo as a bank transaction. If you incur a fee through your bank, such as for printing checks or overdraft fees, the bank will debit your account directly to cover that fee. This will show up on your bank statement as a transaction labeled as a debit memo or debit note.
Incremental Billing
If you’re involved in billing for B2B transactions, you may encounter debit memos. A seller might issue a debit memo to a buyer for several reasons:
• If there were errors on the original invoice
• If the buyer paid upfront, but the project costs were higher than expected
• If the cost of materials or labor increased during the course of the project
• If the scope of the work changed and resulted in higher costs
Internal Offset
If a customer’s account has a credit balance of insubstantial value, a company can issue a debit memo to clear out the balance. If the balance is large enough to be considered material (i.e., a significant amount of money), the company would typically refund the customer rather than issue a debit memo.
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Debit vs Credit Memorandum: What’s the Difference?
Credit memos are essentially the opposite of debit memos. In banking, credit memos alert customers of an increase in their account balance. In business, a seller might issue a credit balance to alert the buyer that the original invoice was too high, thus reducing the amount the buyer owes.
Notification to Customers
When a bank issues a debit memo, it typically notifies the customer of the debit on the bank statement. Similarly, a credit memo will show up on a customer’s bank statement.
As a customer, you may receive paper or electronic statements. If you bank online, you can typically check your transactions at any time on the app or website. When you receive notification of a debit, you’ll want to take it into account when balancing your bank account.
Invoicing
As a seller issuing a debit memo, you’re notifying the buyer that you’re increasing the final invoice amount. A credit memo does the opposite: It notifies the buyer that you’re reducing the final invoice amount.
Recording the Reduction
In the event of a debit memo, the seller will record an increase in the accounts receivable amount, and the buyer must record the larger debit in their accounts payable ledger. For a credit memo, the seller records a decrease in the accounts receivable amount, while the buyer records a smaller debit from accounts payable.
Debit: Remit Payment vs Credit: Future Purchases
To clarify a bit more, debits are amounts owed that must be remitted to settle an account. Credits are money that an individual or business is owed, perhaps reflecting an overpayment, which may be applied to future purchases.
Here’s a summary:
| Debit | Credit |
|---|---|
| Notification of a reduction in bank balance | Notification of an increase in bank balance |
| Increases the amount of an invoice | Decreases the amount of an invoice |
| Buyer must remit payment | Buyer can receive a refund or apply credit to a future purchase |
| Reduces a buyer’s accounts payable | Reduces a seller’s accounts receivable |
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Managing a Bank Account
When you open a checking account or savings account, it’s important to understand the fee structure so that you aren’t surprised by a debit memo on your monthly account statement. You can ask for a fee structure upon opening a new account, and monitor your statements closely to understand what fees are being assessed.
As best as you can, it is a good idea to check your checking account for low balances and set up alerts for all transactions. It can also be wise to activate fraud alerts to help manage your banking security and protection.
The Takeaway
Debit memorandums alert banking customers that funds will be withdrawn from their accounts, often to cover fees incurred. This will lower an account balance, so it’s important to be aware of these changes and make sure your account doesn’t go into overdraft.
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FAQ
Do you pay a debit memo?
A debit memo serves as a notification of a debit from your account. The bank will automatically debit your account. In a business-to-business (B2B) scenario, a debit memo is a form or document that notifies the buyer that the seller has increased the accounts receivable amount.
Who issues a debit memo?
A bank or credit union may issue a debit memo to a personal or company account for specific fees, including bounced checks, insufficient funds, or printing checks. A business may issue a debit memo to another business to correct an invoice that results in underpayment. A business can also use a debit memorandum internally to offset a credit balance in a customer account.
Is a debit memo the same as an invoice?
A debit memo isn’t the same as an invoice. Rather, businesses often issue debit memos as a correction to an initial invoice, typically when they’ve mistakenly undercharged a customer.
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