Debit Note | Debit Memo | Debit Memorandum

All you need to know about debit notes (also known as debit memo or memorandum)

Emilie N.- FCCA, CB, MBS
Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

Share on facebook
Share on twitter
Share on pinterest
Share on linkedin
Contents

What Is a Debit Memo (Debit Note)?

1.  Buyer issues a debit memo and debits Accounts Payable to request a reduction in an amount due to a seller, for example when returning faulty goods.

2.  Seller issues a debit memo and debits Accounts Receivable to increase a buyer’s debt obligations, for example when incrementally increasing a previously invoiced amount due to a clerical error or price change.

3.  Bank issues a debit memo and debits Customer Deposits to reduce a depositor’s account balance, for example when charging fees for servicing client accounts.

Debit Memo: Journal Entry + Examples
Entity Scenario Example Debit Credit
Buyer Buyer decreases an amount owed to a seller Buyer returns faulty goods to a seller Accounts Payable Expenses
Seller Seller increases an amount owed by a buyer Seller increases previously invoiced amount Accounts Receivable Revenues
Bank Bank decreases an amount owed to a depositor Bank charges service fees Customer Deposits Revenues

Examples of Debit Memos (Debit Notes)

1. Accounts Payable: Debit Memos From Buyers

When does a buyer issue a debit note to a seller?

In the context of accounts payable, a buyer issues a debit note (debit memo or memorandum) in order to request a reduction in the amount owed to a seller as a result of:

  1. Purchase cancellation
  2. Incomplete order received
  3. Damaged, deficient, or incorrect goods received
  4. Purchase return
  5. Good lost in transit
  6. Seller failed to deliver goods within an agreed timeframe
  7. Seller overcharged a buyer
  8. Seller gave a discount to a buyer

Sellers can settle debit memo balances– fully or partially–by a refund, discount or credit:

  1. Credit applied to a buyer’s account that will reduce the amount due for future purchases
  2. Discount
  3. Refund payment

The form of settlement depends on:

  • Payment terms agreed between a seller and a buyer
  • Whether the buyer has already paid the invoice
  • If the buyer intends to make further purchases from the seller

In the case of a credit settlement, a seller often issues a formal credit memo in response to the buyer’s debit memo to formally acknowledge the buyer’s request.

Step-by-Step Example [+ Accounting Journal Entries]

An example of a situation when a buyer issues a debit note (memo) to a seller as a request for credit or reimbursement:

1.  Company A makes a credit purchase of 1,000 product units from Company B at $10 per unit.

2.  Company B sends the order to Company A, accompanied with an invoice for $10,000.

3.  Company A and Company B record the respective purchase and sale in their accounting books.

Seller Issues an Invoice to a Buyer
Entity Amount Debit Credit
Seller (Company B) $10,000 Accounts Receivable (Company A) Sales Revenues
Buyer (Company A) $10,000 Purchase Expenses Accounts Payable (Company B)

4.  Company A inspects the delivery on receipt, finds out that 100 of the products are damaged, and decides to return the unusable units to Company B.

5.  Company A creates a debit note and sends it to Company B along with the return of the 100 damaged products, requesting that Company B debits the amount due from Company A by $1,000.

6.     Company B receives the debit note and issues a credit note as proof of reimbursement to Company A after reviewing and approving the request.

7.  Company A and Company B post journal entries into their accounting systems to record the respective purchase return and sales return transactions.

    • Buyer’s current liabilities and expenses decrease as a result of the reduction in the purchases made on credit.
    • Seller’s revenue and current assets decrease as a result of the reduction in the sales made on credit.
Buyer Issues a Debit Note to a Seller
Entity Amount Debit Credit
Seller (Company B) $1,000 Sales Returns Accounts Receivable (Debtor: Company A)
Buyer (Company A) $1,000 Accounts Payable (Creditor: Company B) Purchase Returns

2. Accounts Receivable: Debit Memos From Sellers

When does a seller issue a debit note to a buyer?

In the context of accounts receivable, a seller issues a debit note (debit memo or memorandum) to inform a buyer of an increase in the debt obligations towards the seller for three main reasons:

1.  Notice of debt obligations: Buyer made a purchase on credit, increasing the total amount owed to the seller for unpaid credit orders to date.

2.  Incremental billing: Seller revised an already issued invoice, increasing the amount due from the buyer.

3.  Internal offset: Seller eliminates an immaterial credit balance remaining on a buyer’s account due to overpayment or an accounting error.

2.1. Notice of Debt Obligations

Business-to-business (B2B) sales are often made on credit, where a seller provides goods or services to a buyer before an invoice is paid. In the interim, some companies use debit memos (and credit memos) to keep track of the amounts due in their accounting records.

In this case, sellers send out debit memos as “payment amount due” reminders to keep buyers informed of their current debt obligations and an upcoming invoice.

For example:

A buyer makes a new order on credit, increasing the total amount owed to a seller for unpaid credit orders made so far, which will need to be settled when the seller issues an invoice at a later date.

Even though physical goods are changing hands, money is not, because the buyer is not required to pay until an invoice is issued, as per the payment and credit terms agreed between the seller and the buyer.

In the meantime, the seller sends a debit note to the buyer with each delivery, as well as a periodic statement of total outstanding amounts payable.

2.2. Incremental Billing

Top 5 accounts receivable (AR) situations in which a seller would choose to raise a debit note (debit memo or memorandum) in order to notify a buyer of an increase in the amount due from the buyer:

1. Underbilling due to an error

Correction of an invoice error when a buyer was mistakenly undercharged by issuing a debit memo for the underbilled amount that should have been included in the original invoice.

2. Underbilling due to change in value

A debit memo can also help when the value of previously invoiced items has increased after the date of invoice issue due to changes in price, terms of an agreement, etc.

3. Reversal of payments

Reversal of a payment that was posted to a buyer’s account in error.

4. Reversal of bad debts

Payment received for an invoice previously written off as bad debt, where a debit memo replaces the original invoice and the payment receipt is applied against it.

5. Prepayment reduction

Funds, such as charges and fees, were deducted from a buyer’s credit or prepaid balance.

For example:

  • Company A sells and ships products worth $5,550 to Company B.
  • Company A invoices Company B for $5,005.
  • Company A discovers the billing error and issues a debit note to Company A for the difference of $545 ($5,550 – $5,005).
  • In November 2XX1, Company A sends a $10,000 quotation to Company B for 1,000 units of Product-X at $10 per unit.
  • On 10 January 2XX2, Company B accepts the quotation, which triggers an automatic system-generated invoice.
  • As of 1 January 2XX2, however, Company A has updated its price list and the price of Product-X has increased by $1 to $11 per product unit to reflect the current market conditions.
  • Company A contacts Company B to explain the price increase. Company B accepts the change based on the current year’s price list.
  • Company A sends a debit memo to Company B for $1,000 (= 1,000 product units x $1), which covers the price change from the previous year to the current year, referring to–but not directly affecting–the original invoice already raised.

In both of these scenarios, the debit memo is an additional separate document related to an invoice, which allows a seller to inform a buyer of the need to increase a previously invoiced amount due to extenuating circumstances.

Seller Issues a Debit Note to a Buyer
Entity Scenario Debit Credit
Seller Seller (creditor) increases an amount owed by a buyer Accounts Receivable (assets) Sales (revenue)
Buyer Buyer (debtor) increases an amount owed to a seller Purchases (expenses) Accounts Payable (liabilities)

In practice, however, most entities would issue a new invoice, even for incremental billing amounts, rather than use a debit memo.

Alternatively, a seller could just amend the original invoice, but this may not be allowed under the applicable regulations in order to satisfy proper audit trail requirements.

2.3. Internal Offset

Sellers can also use debit memos (debit notes) internally in order to eliminate any immaterial credit balances that may remain on buyers’ accounts, for example when:

  • a customer slightly overpays an invoiced amount
  • accounting error leaves a residual balance in an account

However, if the credit balance resulting from an overpayment is material, the seller should issue a refund to the buyer or the applicable government agency rather than create a debit memo.

Naturally, any accounting discrepancies should be investigated and rectified.

3. Bank Transactions: Debit Memos From Financial Institutions

When does a financial institution issue a debit note to an account holder?

While a bank can issue a debit note each time an adjustment is made to a client’s account, a debit memo usually takes the form of an item on a monthly bank statement, as a charge displayed with a negative sign.

Debit notes often exclude day-to-day bank transactions performed by the account holders themselves, such as cash withdrawals, debit card use, check outgoing payments or monthly direct debits.

For example:

Company C holds a business account with Bank B. Bank B charges a monthly service fee of $10, which is itemized on Company C’s bank statement as a debit note.

What is the accounting journal double-entry for the monthly service fee–from both the bank’s and the depositor’s point of view?

Bank Issues a Debit Note to a Depositor
Entity Amount Debit Credit
Bank $10 Customer Deposits [reduce liability] Service Charges Revenue [increase revenue]
Account Holder $10 Bank Charges Expense [increase expense] Cash in Bank [reduce asset]

Debit Note in Bank’s Books

The money held in Company C’s account is a liability in Bank B’s books because the bank has the obligation to return the depositor’s cash on demand. This liability is reduced when the bank charges Company C’s account for a service fee with a debit memo.

At the same time, the bank’s revenue earned by servicing the client’s account increases.

Debit Note in Depositor’s Books

Since the bank account is an asset in Company C’s general ledger, the debit memo reduces this asset, while increasing the company’s expenses in respect of the bank fees.

Template: 10 Things to Include on a Debit Memo (Debit Note)

A debit note (memo or memorandum) is typically issued in the same format used for an invoice, including the following particulars:

1.  Names, addresses and contact details of a buyer and seller

2.  Tax details of a buyer and seller

3.  Item description and quantity

4.  Price per unit before and after tax

5.  Total price before and after tax

6.  Date and reference number of the debit note

7.  Date and reference number of the original invoice

8.  Date and reference number of any other relevant sales, delivery or billing documents

9.  Reasons for issuing a debit note, explaining what is owed and why

10.  Payment terms and conditions

Debit Memo vs. Debit Note

Debit Note vs. Invoice

Who Issues a Debit Note?

Can Seller Issue a Debit Note?

A seller issues a debit note (debit memo or memorandum) to inform a buyer of an increase in debt obligations in 3 situations:

  1. Buyer makes a purchase on credit.
  2. Seller incrementally increases an amount on a previously issued invoice.
  3. Seller internally eliminates an immaterial credit balance remaining on a buyer account.

Debit Note vs. Credit Note

What is the difference between a credit memo (credit note) and a debit memo (debit note)?

Debit Note vs. Credit Note: Difference
Debit Note (Debit Memo) Notification of a debit made on a recipient’s account in the accounting records of a sender.
Credit Note (Credit Memo) Notification of a credit made on a recipient’s account in the accounting records of a sender.

Let’s take a look at two examples:

Debit Note vs. Credit Note: Examples with Journal Entries
Example Scenario Buyer returns goods to a seller with a debit memo. Seller corrects a billing error of overcharging a buyer with a credit memo.
Entity Difference Debit Note Credit Note
Sender Definition Debit receiver’s account in sender’s records Credit receiver’s account in sender’s books
Example Buyer reduces Accounts Payable (liability) due to a seller (creditor) Seller reduces Accounts Receivable (asset) due from a buyer (debtor)
Receiver Definition Credited sender’s account in receiver’s books Debit sender’s account in receiver’s books
Example Seller reduces Accounts Receivable (asset) due from a buyer (debtor) Buyer reduces Accounts Payable (liability) due to a seller (creditor)
Share on facebook
Share on twitter
Share on pinterest
Share on linkedin
Emilie N., FCCA, CB, MBS
Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

Sign up for our Newsletter

Get more articles just like this straight into your mailbox.

error: Alert: Content is protected