Debit Memo

Updated on April 12, 2024
Article byWallstreetmojo Team
Edited byPallabi Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

Debit Memo Meaning

A debit memo is a document used to increase the billing of the service or goods or a transaction between the customer and vendor. The major reason to raise this memo is the possibility of a price hike in the products sold, or the workforce required for the job taken might be more than the estimated. Therefore, the extra compensation is required to be charged, increasing the business’s revenue.

Debit Memo

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This memo is a document raised by the accounts to increase the value of Accounts Receivables without affecting the original Invoice Value. It helps to increase the revenue of the business and correct the Invoice Value wrongly raised or shortly raised. It is also raised due to any change in terms of an agreement on the parties’ request.

Debit Memo Explained

A debit memo is a document that is commonly used in the financial accounting process. In any business, this memo is raised so as to create a record or inform the client that there is a change in payment amount and the client has to compensate that to the vendor. The vendor or the seller increases the amount that the client owes to the vendor which can depend on different factors.

In order to explain a debit memo sample, let us discuss a situation where a company provides construction services to a builder, and the remunerationRemunerationRemuneration refers to overall monetary and non-monetary compensation that employees or independent contractors receive for providing services to an organization or company.read more is fixed per the contract. Still, during the period of providing the services, there was a sudden hike in the price of material, and it is genuinely required to raise the price charged to the builder. In this case, the construction company will raise a debit note for the extra charges equivalent to the price hike of the materials. Debit NoteDebit NoteA debit note is a confirmation document sent by a buyer for returning purchased goods or services to a seller. read more is used in the industry to increase the value of the Invoice or remuneration.

From the above situation, the concept of debit memo sample is clearly explained. However, there are different situations that lead to this sudden change. They include any additional charges that are included in the process, like a penalty for late payment, increase in prices or commission, and so on, any discrepancy in prices, taxes, freight charges, etc, that was not correctly billed when payment was made for the goods sold, or any products returned after sales.

Therefore, a debit memo is an essential document in terms of maintaining clarity and accuracy in financial records and keeping track of any changes in the outstanding amount. This ensures that there is clear understanding of purchase and sale procedure among both buyer and seller so that there is no chance of discrepancy in the future.

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Purpose

A debit memo is a document that helps the business to find a solution for their change in invoices without issuing a new invoice. It’s a document to update the invoice value in case of any change in the service or goods being sent to the buyer. A bank debit memo is a document through which the business can charge its customers for any changes made by the customer other than that of a predefined contract or work order without issuing a new invoice. It is the original invoice’s continuation and has to have a reference to the original invoice.

Debit Memo data

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Characteristics

  1. A bank debit memo is an alternative to issuing a new invoice for which an invoice is already raised by the seller or service provider.
  2. A Debit memo is an extension of the invoice already raised to the customers.
  3. Through this memo, the party can make changes in the remuneration due to changes in the service required by the customer or the job update.
  4. A Debit note helps the businesses to increase their revenue in case there are any changes to the pre-agreed terms of the contract.

How To Create?

Creating a debit memo is very simple and easy. It is just a similar process to creating an Invoice for the activity performed, work done, or goods sold.

Following are the steps and data are used –

  • Customer’s name, address, and communication details
  • Your Company’s name, address, and communication details
  • Tax Details of your company as well as the other company
  • Item Description, Quantity, Rate per unit, Total Taxable value
  • Invoice Number and Invoice date
  • Details of the transactions
  • Final Invoice Amount including all taxes
  • Mode of payments and other payment terms
  • Other terms and conditions

While creating a Debit Memo, it should always be remembered to provide a reference to the Original Invoice raised. It should also include why this Memo is raised, i.e., the reason for issuing it. After creating the debit memo, it is only left to be sent to the party/customers.

Example

Let us take a suitable example to understand the concept.

Andy works for Sandy Toys Inc., a toy manufacturing company specializing in children’s toy manufacturing. Andy has cracked a huge client’s order from abroad for which she has sent the quotation, and upon their acceptance, she Invoiced the price of the toys based on the price list, which was old and for the previous financial year. She has conveyed the same to its customers, to which they have accepted the change in price based on current year prices. Now suggest the ways for Andy to overcome this situation.

Solution:

Considering today’s busy and tight schedules of the employees in the industry, it is common to have made some mistakes by any employee. Now, this is generally a common mistake to which there are simple solutions. First, Andy can raise a new Invoice by canceling the previous invoice by raising a Credit NoteCredit NoteA credit note is a financial document that sellers provide to buyers as a token of confirmation against registered returns. It acknowledges the cancellation and lets the sellers make a credit entry to the buyers’ account for the required amount. read more. The second is that Andy can raise a Debit Memo referring to the Original Invoice and issue this memo with the net change in the price from the previous year to the current year without affecting the Original Invoice already raised.

We get a clear idea about the entire process of debit memo request from the above example. We note how the change in the amount is settled through raising the document so that the alteration is recorded correctly for future reference. Thus, this document is an essential part of  and business.

Advantages

The following can be explained in terms of the benefits or advantages –

  1. It helps make changes in the Invoice value without issuing a new Invoice.
  2. It helps in correcting the mistakes of the wrong invoice raised.
  3. It is a document raised by the Seller or provider of service and not the purchaser or receiver of service.
  4. From the above points is can be derived that this document of debit memo request helps in maintaining clarity and transparency in financial accounting process so that both vendor and client has proper communication and information to avoid disputes in future.
  5. Both the parties have a clear understanding of the transaction changes.
  6. This is a perfect method to settle all price related discrepancies so that after adjustment, the correct amount is reflected in the books of accounts.

Disadvantages

Let us go through the disadvantages of the same in details as given below.

  1. It is again additional documentation in terms of handling. . The seller needs to create or raise the memo in the system and also send it to the client for communication and adjustment. There will obviously be more documentation involved in the entire process.
  2. It is additional work for the accounts department to raise documents for the same transaction. They need to be very vigilant regarding any changes in the outstanding payment amount and raise the memo to correct the changes immediately so that it does not get escalated or create any discrepancy later on.
  3. There is every possibility of misunderstanding or miscommunication since the client may not always agree to any change after the transaction has already taken place because debit memo format creates a financial burden for them in terms of payment adjustment. They may not want to deviate from the amount that was originally agreed upon.
  4. Another negative effect of this process is that it may affect the relationship of the seller with the buyer. AS it can be derived from the above point, the buyer may not agree or there may not always be proper and clear communication. Repeated changes in prices or incorrect billing which may destroy the good faith.

Thus, it is important to understand the pros and cons of the concept and document before using it. It is always better to create agreement of sale and purchase by factoring in any possible changes in price, tax or any other amount so that it may not be necessary to make changes later. This will ensure a smooth process flow and less complexity in  maintenance of financial records.

Debit Memo VS Credit Memo

Both Debit & Credit are just the opposite of each other. Their difference is explained as follows:

  1. A Debit Memo is a document that increases the accounts receivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more, whereas Credit Memo is a document that decreases the account receivables.
  2. A Debit Memo is to increase the price of Invoice Amounts, whereas a Credit Memo is to decrease the price of the Invoiced Amount.
  3. A debit memo format is raised by the Seller, Service provider, whereas the Credit MemoCredit MemoA credit memorandum, also known as a credit memo, is a document issued by a seller to a buyer that serves as the source document for the sales journal and informs the buyer that the seller will credit the amount owed to the seller.read more is raised by the Purchaser or Service Receiver.

Recommended Articles

This article has been a guide to debit memo and its meaning. We explain its differences with credit memo with examples, how to create, purpose & characteristics. You may learn more about financing from the following articles –

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