Billing customers and clients aren't always smooth. If an invoice turns out to be too high or too low, a company can issue a debit or credit memorandum to correct it. Banks use memos to make adjustments to business checking accounts. The company on the receiving end of a memo can use it to track how much to adjust its account books.
Invoices: Debit Versus Credit
Suppose you call in a plumber to your business and set them to work on the bathrooms. The plumber writes up an invoice, but there's a miscalculation. The company can issue a debit memorandum if they under-billed you or a credit memo if they over-billed. It can also issue an amended invoice stating the correct total.
The memo should explain why the invoice has to be adjusted. For example, a credit memo from a vendor might state that your bill has been adjusted because you returned some of the supplies you ordered. If you've already paid before you receive the credit memo, you can ask for a cash payment or use it for a discount on the next order.
If you haven't paid the bill yet, you record the memo by adjusting your accounts payable. The seller likewise records it as an adjustment to accounts receivable.
Memos and Banks
Banks use credit and debit memos too, as items on business bank statements. You may spot a debit memo if the bank has to debit your account for fees such as insufficient funds, service charges or the cost of printing checks. You might get a credit memo for interest earned on the account.
You have to include the amounts from debit and credit memos in your financial records. You do this whenever you reconcile your books to your bank statement. On your balance sheet, a memo will increase or shrink your cash account, as well as affecting others such as miscellaneous expenses or interest earned, depending on whether the account grows or shrinks.
Sometimes a debit or credit memo is useful for your own internal operations. Companies issue credit and debit memos when they're clearing up a small balance in an account. Suppose your customer overpaid $5 on his last order. You send him a refund, then you adjust your accounts to reflect the $5 loss. A memo authorizes your accountants to make the change to his account.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com