What Is A Debit Memo And How Does It Work?
The act of undercharging is quite common in businesses. Unfortunately, this is something many freelancers are familiar with. Freelance project workers often realize they’ve undercharged their services when compared with the amount of time and energy expended. In such a case, the service provider will have to make a billing adjustment. This is where a debit memo comes into play.
What Is A Debit Memo & For What Is It Used For?
This memo is a legal document that informs the customer of a debit adjustment made to their accounts. It’s the opposite of a credit memorandum where the latter is used to reduce or write off an over-billed invoice.
At times when businesses are required to increase the billed amount, they choose to release a new invoice. This is an alternative to a debit memo. For example, if your client asks for additional services that weren’t part of the original agreement, you can either issue a new invoice or use a debit note. Moreover, you’ll be required to leave a record of any memos on your monthly statement of the accounts receivables.
Generally, debit memorandums are issued for reasons relating to bank fees, under-billing invoices, or adjusting accidental positive balances in the customer’s account. A memo resolves these through an internal offset, incremental billing, or bank transactions.
What Information Does A Debit Memo Contain?
The information that goes on a debit memo or debit note is similar to that which goes on an invoice. When creating a memo, you must include:
- Customer’s name and contact details (phone number, address, fax, and so on)
- The name of your company along with the contact details (phone, address, and so forth)
- Tax information about your company as well as your client’s
- Description of items/services (quantity, price-per-item, total price, taxable value, and so on)
- Invoice number and invoice date (lists details of the invoice against which you’re issuing the memo)
- Transaction details
- The total amount with tax included
- Payment method
- Terms of payment
- General terms and conditions applied
- Reasons for issuing the memo
Make sure to reference the original invoice when issuing a memo.
When Do You Issue A Debit Memo?
Debit notes can be issued both from a buyer or a service provider.
Buyers issue a debit note when they receive items with defects, purchases/services they’re not satisfied with, or when an item doesn’t match the original order.
As a business owner, you might be required to issue a debit note in the following cases:
- Internal offset: At times, customers may end up making an overpayment. You can issue a credit memo, in this case, to offset the positive outstanding balance although some businesses prefer to make a refund. It’s better to use a debit note only when the residual balance is the result of an accounting error
- Incremental billing: If you feel that you have undercharged your client for an item or a service, you can issue a debit note for the additional charges. You can also issue a debit memorandum for additional services that you’re required to perform. Again, many companies generally prefer to send a new invoice instead
- Bank transactions: Retail banks also use memos to charge for bank service, bounced checks, and rental fees (for using expensive devices and software)
How Does A Debit Memo Impact The Books?
- Just as how a credit memo affects your accounts, so does a debit note. The main difference is that a debit note affects your accounts receivables while a credit memo affects the payables
- When you issue a debit note, you’re required to record the memo on your monthly statement for the outstanding receivables
- With a debit note, your receivables witness an increase as opposed to a credit memo which increases the accounts payables
How To Create A Debit Memo And Apply It To An Invoice?
You can create a debit note using an invoicing software or a word processor.
- If you’re using accounting software, enter the ‘debit note’ in the field of ‘order type’. Alternatively, you can begin by adding your company logo in the word file
- Enter all the relevant information mentioned earlier. This relates to your company as well as the receiver. Include item descriptions, total amount, terms of payment, and so forth
- Include reasons for issuing the memo. Use a polite tone
- Include the reference number of the original invoice against which you’re issuing the debit note
Now that you’ve pinned down the debit memo definition in accounting, you’re that much closer to having a successful business. By making the right use of these documents, you ensure positive and uninterrupted cash flows for your business in the longer run.