Debit MemoDefined with Examples
What is a Debit Memorandum?
A person’s bank statement usually has three columns on the right side that represents credit, debit and balance.
A credit is money that is deposited into the account, debit is money that is taken out from the account and the balance will show how much money is left in the account.
A Debit Memorandum or simply called Debit Memo is a type of adjustment in a person’s bank account that typically represents transactions other than the normal debits that occur.
Transactions such as bank fees, correction of invoices underbilled by sellers, or a correction of the balance in the person’s bank account are just some of the examples of why a debit memo is done.
Understanding a Debit Memorandum
Three instances of why a Debit Memo may be issued are: for bank transactions (refers to bank related fees such as bank charges and other bank related fees), incremental billing (when sellers have charged the customer for lower than the actual price) or for offsets by the bank internally (for offsetting credit balances).
For Retail Banking:
Transactions that give rise to debit memos when it comes to retail banking are bank service fee, checkbook printing, charges due to insufficient funds of a check or checks issued.
When customers receive their bank account statements at the end of each month, they will be able to see the debit memo charged with a negative sign after the amount.
For example, a bank customer has a balance in his or her account for $3,000 and has made a request for additional printing of checks for which it was charged $40.
The fee is issued as a debit memo and the balance of the customer will then be $2,960.
$3,000 starting balance – $40 bank fee = $2,960 remaining balance
For Business to Business Companies:
The purpose of debit memos for business to business transactions is to rectify a billing error issued by one party to the other.
It is an adjustment made in order to reflect the correct amount of the charge.
For example, suppose Company A charged Company B for an amount of $75.
Upon checking, Company A found out that they made an error in the amount charged to Company B resulting in an underbilling of $25.
To correct this error, Company A will issue a debit memo to Company B with an explanation of the reason for the balance amount being charged.
Offsets are made when the amount is almost negligible and is very small.
An example is when a customer has a very small amount left in his or her account.
To offset this balance, an accounting staff can issue a debit memo.
This debit memo issuance can be done within a firm.
Another example is when customers make small over-payments on their purchase.
Merchants can simply issue a debit memo for the over-payment and remove the positive balance or issue a refund instead when the amount is material.
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Bridgewater State University "EXERCISE 6-9" Page 1 . January 4, 2022