The Differences Between a Credit Memo and Debit Memo
Last Updated October 21, 2024
As nice as it would be to never need to make invoice adjustments, it’s a relatively common practice in business accounting. Understanding the difference between a debit memorandum vs. credit memorandum (also known as a credit note vs. debit note) is key to ensuring that you adjust client account balances properly. Not only will this help you properly record balances and transactions, but it can also help you maintain better relationships with your customers.
Here’s what you should know about the differences between debit memos and credit memos.
What Is a Credit Memo?
A credit memo, also sometimes referred to as a credit note or credit invoice, is issued by sellers to buyers to reduce the amount of money owed on an invoice. Credit memos are applied as a credit to an invoice or overall account instead of the seller providing a cash refund.
Purposes of a Credit Memo
The purpose of a credit memo is to issue credit to a customer’s account rather than making a cash payment. A credit memo documents the official transaction for the business’s accounting to note the adjustment to the invoice or account. Credit memos are most often issued as a way of resolving disputes with customers or as part of a promotion. As such, issuing a credit can go a long way in strengthening customer relationships.
Impact of a Credit Memo
When a credit note is posted to the customer account, it reduces the total amount of the customer’s accounts payable. For the business that issued the credit memo, the memorandum reduces their accounts receivable. Officially noting the change with a credit memo ensures proper auditing of the business’s cash flow.
Examples of When a Credit Memo Is Issued
A credit invoice may be issued for a variety of reasons. In business transactions, it may be issued to resolve a price dispute (such as when a customer purchases an item that goes on sale the next day), to provide an exchange credit when a customer needs to return a defective item, or as part of a marketing promotion. Some businesses also issue credits as a way to incentivize customers to submit early payment for their invoices.
What Is a Debit Memo?
So, now that we’ve covered credit memos, what is a debit memo? The debit memo’s meaning varies between banking and business transactions. However, in broad terms, a debit memo is simply the opposite of a credit memo. Rather than a credit being applied to an account, additional funds are debited from the account.
Purposes of a Debit Memo
In business, debit memos are issued as an adjustment to the original invoice that was sent to a customer. Debit memo correction may occur if the seller inadvertently underbilled for its goods or services. A debit memo may also be issued if a customer doesn’t pay the invoice, and a late fee needs to be added to the original invoice.
Debit memos are common in banking, where debit memos are often applied if a customer overdraws their account, as well as for monthly account fees or credit card interest. A force pay debit memo is often used in these scenarios, prioritizing that debit transaction within the bank’s systems over any other pending transactions. Banks will automatically withdraw these debits from the customer’s account.
Impact of a Debit Memo
A debit note has the opposite effect of a credit note. The amount owed by the customer (and included on their accounts payable) will increase. Similarly, the business will increase the total of its accounts receivable linked to the affected invoice.
Examples of When a Debit Memo Is Issued
A common debit memo example in business is when a client is accidentally underbilled. If, for some reason, the client is sent an invoice that is less than the originally agreed-upon amount, it is up to the seller to provide a debit memo that explains the underbilling issue that occurred and revise the invoice with the correct amount. The client is then responsible for paying the revised total.
In banking, a debit memo will typically appear on a customer’s account as a negative charge, generally with a brief explanation as to why the account was debited (such as a monthly account fee or an overdraft fee).
What Is Included on a Credit Memo and Debit Memo?
For business transactions, both credit memos and debit memos will include similar information related to the original invoice or customer account. This may include the purchase order number, a description of the original purchase order (such as a description of the products or services purchased, their quantity, and the date of the purchase), and the customer’s account number.
The credit note and debit note will also include the credit or debit that is being applied to the invoice, as well as a description of why the memo is being issued. The updated total will also be included on the invoice.
In-Summary: Credit Memo vs. Debit Memo: What’s the Difference?
Credit memos and debit memos fulfill similar, though opposite, roles in business accounting. Credit memos, also known as credit notes or credit invoices, apply credit to a customer’s account or lower the total amount that they owe on an invoice, while debit memos place an additional charge on the customer’s account or invoice.
| Credit Memo | Debit Memo | |
| Definition | It adds credit to a client’s account balance or reduces the amount owed on an invoice. | It debits a client’s account balance or increases the total amount owed on an invoice. |
| Purpose | Issues credit to a customer’s account rather than providing a cash payment or refund. | Ensures that sufficient payment is rendered to the seller/service provider. |
| When to Issue | • Resolve pricing disputes
• Manage returns/product exchanges • Marketing promotions • Apply discounts to invoices |
• Correct underbilling mistakes
• Apply late fees • Various banking fees |
| Impact on an Account | Issues a credit to the customer’s account (reducing their accounts payable). | Debits the customer’s account (increasing accounts payable). For banking debit memos, a direct withdrawal is often made automatically. |
Whether you need to credit or debit a customer’s account, sending updated documentation with the appropriate memorandum is essential to eliminate miscommunications and ensure that all financial transactions are properly recorded and accounted for.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
