Credit and debit memos are documents or items on financial statements that add to (in the case of a credit) or reduce (in the case of a debit) your account balance. They are used to correct charge mistakes or any changes in the amount you owe or the amount due to you.
When reading bank statements or invoices from vendors, you may see these two terms and want to know more about what they are and why they are important.
What Is a Credit Memo?
You may see a credit memo on an invoice from a vendor, on your bank statement, or on your credit card statement. No matter where you see the credit memo, it signifies the same thing.
A credit memo is shown when money is added to an account. In the case of a bank or credit card statement, you might see a credit memo if you were reimbursed for fees or earned interest on a bank account. With a vendor invoice, you might see a credit memo if you were overcharged on a previous invoice and are now receiving credit for that amount you overpaid.
Use Cases
A common use case for a credit card memo is tracking a business expense that you may have returned. For example, a small business owner makes a purchase for office supplies using a company credit card. In the memo field, they write “Office supplies for Q3” to clearly note the purpose of the purchase. If the business owner returns the office supplies, they’ll see a credit on their account for the purchase price. This will be a new line item on their ledger, as opposed to the charge just disappearing.
Information Found on a Credit Memorandum
In addition to showing the amount credited, a credit memo may also have the following details. If you’re keeping statements, it can be helpful to know what to look for to find a particular credit memorandum, including:
• Payment terms
• Invoice number
• Description of item(s) purchased
• Price paid or owed
• Details on credit
• Number of items on the purchase order
• Date of purchase
• Customer’s bank account number
• Financial institution number
• Shipping address
For a bank or credit card statement, you will find the date of the credit issued, a description of the credit, and the amount.
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Bank Account and Credit Card Statement Credit Memos
A credit memo on a bank account or credit card statement indicates a positive adjustment or refund. It reduces the amount owed by the customer, often resulting from returns, billing errors, or overpayments. Credit memos include:
• Interest earned
• Fees reimbursed
• Reimbursement of unauthorized transaction
• Credit for returned product purchase
Vendor Invoice Credit Memos
A vendor invoice credit memo is issued by a supplier to adjust or reduce the amount owed by a customer. It may include:
• Correction of invoice error
• Credit for overpayment
• Discount for paying invoice early
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What Is a Debit Memo?
In contrast, a debit memo, also called a debit memorandum, decreases the amount of money in an account.
For bank and credit card statements, that might be a fee or interest charged. For vendor invoices, the debit memo might happen when you are charged a late fee for an unpaid invoice.
It’s important to understand the difference between a credit memo vs. debit memo because the amount of money you have in your business bank account (or the amount you owe on a credit card or vendor invoice) will be impacted, as will your accounts payable.
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Use Cases
A common use case for a debit memo would be if a company invoiced the wrong amount to the supplier, for example. If the invoice was too low, the company can issue a debit memo to correct it. The invoice would then be increased, and the supplier would make the appropriate adjustments with the memo, as well.
Information Found on a Debit Memorandum
The same information can be found on a debit memorandum, though, of course, you’ll find details on the debit, rather than the credit, including:
• Payment terms
• Invoice number
• Description of item(s) purchased
• Price paid or owed
• Details on debit
• Number of items on the purchase order
• Date of purchase
• Customer’s bank account number
• Financial institution number
• Shipping address
For a bank or credit card statement, you will find the date of the debit charge, a description of the debit, and the amount.
Bank Account and Credit Card Statement Debit Memos
A debit memo on a bank account or credit card statement indicates a charge or deduction. This can occur from transactions like fees, withdrawals, or adjustments due to billing errors. Debit memos increase the amount owed or reduce the account balance. Bank account and credit card statement debit memos include:
• Monthly account fees
• Credit card interest charges
• Annual credit card fees
Vendor Invoice Debit Memos
A vendor invoice debit memo is issued by a buyer to request an increase in the amount owed to the vendor, often due to underbilling or additional services. It may include things like:
• Fees for late payments
• Reconciliation for undercharging on previous invoice
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Key Differences Between a Credit Memo vs Debit Memo
Here are the key differences between a credit memo and a debit memo:
• Purpose:
◦ Credit Memo: Reduces the amount owed by the customer.
◦ Debit Memo: Increases the amount owed by the customer.
• Usage:
◦ Credit Memo: Issued for refunds, returns, overpayments, or billing errors.
◦ Debit Memo: Issued for underbilling, missed charges, or additional services.
• Effect on Account Balance:
◦ Credit Memo: Decreases the account balance for the business or creates a refund.
◦ Debit Memo: Increases the account balance for the business or adds to the amount due.
• Financial Direction:
◦ Credit Memo: Reflects a credit to the buyer’s account.
◦ Debit Memo: Reflects a debit to the buyer’s account.
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When Are Credit Memos and Debit Memos Used?
There are a few scenarios where you, a bank, a credit card company, or a vendor may use a credit or debit memo.
The first is to correct an error. If you were overcharged (or undercharged) on an invoice, or if the amount owed otherwise included an error in calculation, the easiest way to rectify this error is by issuing a credit or debit memo on the next invoice.
If a customer wants to return a product or get a refund, a credit memo may be issued. Note that a credit memo isn’t the same as a refund. With a refund, the original transaction is typically reversed. With a credit memo, a separate transaction is conducted to credit the amount owed.
Another situation where a credit memo may be used is when a customer is given a discount for a purchase. Maybe you paid an invoice early and got a credit for a percentage of the invoice amount, or maybe the product was on sale or you purchased in bulk and got a discount through a credit memo.
With a debit memo, you may be charged a fee, such as for a late payment, an overdraft, or simply a monthly fee for a bank account.
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The Takeaway
Understanding both credit memos and debit memos can help you more easily interpret bank and credit card statements, as well as vendor invoices. This helps you better manage your business finances.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Is a debit memo positive or negative?
A debit memo, in the case of a vendor invoice or credit card statement, increases the amount owed. In the case of a bank statement, it’s a reduction in the amount of money in the account.
Is the credit memo a refund?
A credit memo is similar to a refund, but it’s not exactly the same thing. Rather than reversing the initial charge, a credit is given as a separate transaction for the same amount as the original purchase.
Why is it called a credit memo?
A credit memo provides a credit, or increase, in the amount of money in an account.
Photo credit: iStock/Inside Creative House
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