A memo entry is a note or record made for future reference. It is used in accounting and bookkeeping as a record of transactions or events that can help in understanding the financial entries made in a firm’s books.
Memo entries can be used to document any information that the bookkeeper or business owner believes is necessary for understanding or contextualizing financial transactions. This can include, for example, details about why a certain journal entry was made, clarifications about complex transactions, or explanations of errors or discrepancies.
However, it’s important to note that memo entries do not affect the balances of any accounts in the general ledger. They are purely informational and are used to improve the transparency and traceability of the financial records.
For example, a memo entry can be used to record the details of a transaction involving a post-dated check. While the check cannot be deposited until the date on the check, and therefore would not yet appear in the cash account, a memo entry can be made to record the details of the transaction. This way, the information is already recorded and can easily be referred back to when the check is finally deposited and the cash account is updated.
Example of a Memo Entry
Let’s consider an example of a memo entry involving a large, one-time purchase.
Imagine a small business decided to purchase a new piece of equipment for $5,000. The purchase is significant for this business and is not a regular occurrence. In this case, when the transaction is recorded in the company’s financial records, a memo entry might be made alongside it.
The standard journal entry for this transaction would look something like this:
- Debit: Equipment $5,000
- Credit: Cash $5,000
The memo entry accompanying this journal entry might read something like:
- “Memo: The large debit in the Equipment account on this date corresponds to the purchase of a new XYZ machine, which is expected to increase production capacity by approximately 20%. This is a one-time, non-recurring expense.”
This memo entry provides additional context for the transaction. It explains why there is a large, unusual debit in the Equipment account and notes that it is not expected to recur in the future. It also provides some justification for the purchase by noting the expected increase in production capacity.
In this way, the memo entry helps to provide a more complete understanding of the company’s financial activities and the rationale behind them. This can be particularly useful when reviewing the financial records at a later date, or when the financial records are being examined by someone who was not directly involved in the transactions (like an auditor, for example).