Debit Memorandum: Definition in Three Scenarios

What Is a Debit Memorandum?

A debit memorandum, or debit memo, is a document that records and notifies a customer of a debit adjustment made to their individual bank account.

The adjustment made reduces the funds in the account. Debit memos have specific purposes and are used only for adjustments beyond normal debits.

The reasons a debit memorandum may be issued relate to bank fees, incorrectly prepared invoices where the amount owed should be greater, and rectifying accidental positive balances in an account.

Understanding a Debit Memorandum

A debit memo is issued in three general cases:

• When a bank customer's account balance is reduced due to fees and other service charges
• When a business under-bills a buyer for goods or services purchased
• When a business makes an internal offset to a minor credit balance in a customer account

These situations usually are referred to as bank transactions, incremental billing, and internal offsets, respectively.

Bank Transactions

In retail banking, a debit memorandum is provided to an account holder to indicate that an account balance has been decreased due to a reason other than a cash withdrawal, a cashed check, or use of a debit card.

Debit memos can arise as a result of bank service charges, bounced check fees, or charges for printing checks.

The memos typically are shown on bank customers' monthly bank statements; the debit memorandum is noted by a negative sign next to the charge.

Incremental Billing

In business-to-business transactions, a debit memo is an adjustment procedure following an inadvertent under-billing of goods or services purchased a customer. It is intended to correct a billing error.

The business notifies a customer that the debit memorandum will increase what they owe and change their accounts payable. For instance, if ABC Co. fills an order for XYZ Inc. and invoices it for an amount that is short of the agreed-upon price, ABC Co. will issue a debit memo to XYZ Inc. to indicate the under-billing and to explain the correct amount due.

Internal Offset

A debit memo can be created by a firm's accounting department to offset a credit balance that exists in a customer's account.

If a customer pays more than an invoiced amount, intentionally or not, the firm can choose to issue a debit memo to offset the credit and eliminate the positive balance.

If the credit balance is considered material, the company most likely will issue a refund to the customer instead of creating a debit memo.

The Bottom Line

A debit memorandum represents an action taken by a bank or other business to alert a customer to a decrease in their account balance and the reason for it. The debit memo can clarify for the customer that the change in their available funds is due to, for example, a bank fee and not a transaction that the customer made.