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You want to know the difference between a credit memo and a debit memo? Kudos to you as a business owner who’s making an effort to really understand your company’s finances! Even if you’re not an accountant, it’s smart to get to know key financial terms like credit memo and debit memo.When reading bank statements, as well as 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?
There are a few places you may see what’s called 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.
Credit Memo Examples
Now let’s look at a few credit memo examples so you can better identify them when you see them.
Bank Account and Credit Card Statement Credit Memos
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.Recommended: Opening a Savings Account in 2023
Debit Memo Examples
Now let’s look at some debit memo examples.
Bank Account and Credit Card Statement Debit Memos
Reconciliation for undercharging on previous invoice
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.
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.
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.
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.
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, where 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, overdrafting an account, or simply a monthly fee for a bank account.
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.
Speaking of finances: could your business use a little cash flow? Find the best business loans with Lantern:
Frequently Asked Questions
Is a debit memo positive or negative?
Is the credit memo a refund?
Why is it called a credit memo?
Photo credit: iStock/Inside Creative House
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About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
