Debit Memo

What is Debit Memo?

A debit memo is a document that is used to increase the billing of the service or goods or a transaction took place between the customer and vendor. The major reason to raise this memo is the possibility of a price hike in the products being sold, or the workforce required for the job taken might be more than the estimated and therefore there is a requirement for the extra compensation to be charged and results in an increase in the revenue of the business.

Explanation

Let us discuss a situation where a company provides construction services to a builder, and the remuneration is fixed as per the contract. Still, then 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 to be charged equivalent to the price hiked of the materials. It is the use of Debit NoteDebit NoteWhen a percentage of the goods have a defect, the purchaser of the goods sends a debit note to the supplier of the goods, stating that they will reduce the purchase amount payable after adjusting for the defective goods.read more in the industry to increase the value of Invoice or remuneration charged.

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 used to update the invoice value in case of any change in the service being provided or goods being sent to the buyer. A Debit Memo is a document through which the business can charge its customers for any kind of changes made by the customer than that of a predefined contract or work order without issuing a new invoice. It is the continuation of the original Invoice and has to have a reference of the original invoice.

Debit Memo

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Source: Debit Memo (wallstreetmojo.com)

Characteristics

  1. It is an alternate to issue a fresh invoice for which an invoice is already raised by the seller or service provider.
  2. A Debit memo is an extension of the invoice which is 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 updated.
  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.

Creating a Debit Memo

Creating a debit memo is very simple and easy. It is just a similar process as involved in creating an Invoice for the activity performed or 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 of a Debit Memo

Andy works for Sandy Toys Inc., a toy manufacturing company that has specialization in children’s toy manufacturing. Andy has cracked a huge client’s order from the 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 is that Andy can raise a new Invoice canceling the previous invoice by raising a Credit Note. 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.

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 refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet.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 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.

Advantages

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

  1. It helps in making 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 that is raised by the Seller or provider of service and not the purchaser or receiver of service.

Disadvantages

  1. It is again additional documentation in terms of handling.
  2. It is additional work for the accounts department in raising documents for the same transaction.

Conclusion

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

Recommended Articles

This article has been a guide to what is a debit memo and its meaning. Here we discuss characteristics, for example,s and how to create a debit memo along with advantages and disadvantages. You may learn more about financing from the following articles –

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