All you need to know about debit notes (also known as debit memo or memorandum)
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|
|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|
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:
Sellers can settle debit memo balances– fully or partially–by a refund, discount or credit:
The form of settlement depends on:
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.
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|
|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 Issues a Debit Note to a Seller|
|Seller (Company B)||$1,000||Sales Returns||Accounts Receivable (Debtor: Company A)|
|Buyer (Company A)||$1,000||Accounts Payable (Creditor: Company B)||Purchase Returns|
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.
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.
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.
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:
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.
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.
Reversal of a payment that was posted to a buyer’s account in error.
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.
Funds, such as charges and fees, were deducted from a buyer’s credit or prepaid balance.
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|
|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.
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:
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.
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.
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|
|Bank||$10||Customer Deposits [reduce liability]||Service Charges Revenue [increase revenue]|
|Account Holder||$10||Bank Charges Expense [increase expense]||Cash in Bank [reduce asset]|
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.
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.
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
A seller issues a debit note (debit memo or memorandum) to inform a buyer of an increase in debt obligations in 3 situations:
|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)|
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