A debit memo is simply a message that tells the receiver that their account has been debited by the sender in the sender’s bookkeeping records. If a client bounces a check or you want to reverse a previously issued credit memo, you would use a debit memo to handle the situation. The debit memo increases the balance of an invoice.
It is easy to remember the meaning of the term debit memo because it has the word debit in it, which just means the amount on the left-hand side of a ledger (when there is no other meaning to the debit). When it comes to the whole phase debit memo, it is important to keep in mind that the account is debited in the sender’s records and no the recipient’s. That is why the debit often is going to be doing the opposite of what the recipient’s records may be doing. Keeping that in mind, we can see why debit still just means an amount on the left-hand side.
When considering this in terms of your bank account, this definition can be somewhat confusing. When a bank issues a debit memorandum saying that you were charged for bank services, it might seem that they should have credited your account. However, from the viewpoint of the bank, they have made money and their account has increased, so they used a debit entry to increase their service revenue.
What it does to your account is decrease your checking (banking) account. Although there might be a debit on your bank statement, what you need to remember is that for your records is that you would reduce the balance of your checking account with a credit entry. So, once again, why are they calling it a debit memo? Because it is on their records.
Let’s look at an example to help you better grasp this simple, yet somewhat puzzling term for some.
Deer Inc. ordered goods worth $15,000. The Clear Sky company sent goods worth $15,000. However, when Deer Inc. received the goods, it turned out that $7,000 worth of goods are of bad quality. Thus, Deer Inc. did not accept this portion of the goods.
To account for the goods that were paid for but arrived in an unsatisfactory condition, Deer Inc. issues a debit memo of $7,000. Now, Deer Inc. has $7,000 on its account with Clear Sky and can order a new batch of goods. To respond to Deer Inc., the seller can issue a credit note to tell the buyer that the return was accepted and money returned.
As you can see, when it comes to the debit memos, you immediately need to think of it as if you are the sender of the note. If you are the receiver of the memo, to record everything in your bookkeeping records, you need to do exactly the opposite, i.e. credit the amount specified in the note.