A debit memo, also known as a debit memorandum, is a document that a buyer issues to a seller, indicating a reduction in the amount that the buyer owes to the seller under the terms of an earlier invoice.
Debit memos are commonly used in B2B transactions and may be issued for several reasons:
- Returns or Rejections: The buyer may return goods or reject services that were previously billed. The debit memo reduces the buyer’s payable balance by the value of the returned or rejected items.
- Overcharges: The seller may have made an error in the original invoice, such as charging too much for a product or service. A debit memo can correct the overcharge.
- Early Payment Discounts: If the seller offers discounts for early payment, and the buyer takes advantage of this offer, a debit memo can document the discount.
In all these cases, the debit memo serves as the buyer’s record of the reduction in the amount owed. The seller, upon receiving the debit memo, would typically issue a credit memo to acknowledge the reduction in the amount receivable.
It’s worth noting that the term “debit memo” can also refer to an internal document used by a bank when it needs to adjust a customer’s account downwards for some reason, such as a service charge or a loan payment.
Example of a Debit Memo
Suppose a company, ABC Ltd., purchases 100 units of a product from its supplier, XYZ Inc., at $10 per unit. XYZ Inc. sends an invoice to ABC Ltd. for $1,000.
However, ABC Ltd. finds that 10 units are defective and decides to return these to XYZ Inc. To document this return and the corresponding reduction in the amount payable, ABC Ltd. prepares a debit memo.
The debit memo might look something like this:
|To: XYZ Inc.
|From: ABC Ltd.
|Reason: Return of Defective Units
|Description: 10 units returned, @ $10/unit
ABC Ltd. then sends this debit memo to XYZ Inc. Upon receiving the debit memo, XYZ Inc. would acknowledge the returned goods and the reduction in the amount receivable by issuing a credit memo to ABC Ltd.
The final result is that ABC Ltd. now owes XYZ Inc. only $900 instead of the original $1,000. The debit memo from ABC Ltd. and the credit memo from XYZ Inc. provide a record of this adjustment.