What is Debit Memo?

Explanation

Let us discuss a situation where a company provides construction services to a builder, and the remunerationRemunerationRemuneration refers to overall monetary and non-monetary compensation that employees or independent contractors receive for providing services to an organization or company.read more is fixed per the contract. Still, during the period of providing the services, there was a sudden hike in the price of material, and it is genuinely required to raise the price charged to the builder. In this case, the construction company will raise a debit note for the extra charges equivalent to the price hike of the materials. Debit NoteDebit NoteA debit note is a confirmation document sent by a buyer for returning purchased goods or services to a seller. read more is used in the industry to increase the value of the Invoice or remuneration.

Purpose

A debit memo is a document that helps the business to find a solution for their change in invoices without issuing a new invoice. It’s a document to update the invoice value in case of any change in the service or goods being sent to the buyer. A Debit Memo is a document through which the business can charge its customers for any changes made by the customer other than that of a predefined contract or work order without issuing a new invoice. It is the original invoice’s continuation and has to have a reference to the original invoice.

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Characteristics

  • It is an alternative to issuing a new invoice for which an invoice is already raised by the seller or service provider.A Debit memo is an extension of the invoice already raised to the customers.Through this memo, the party can make changes in the remuneration due to changes in the service required by the customer or the job update.A Debit note helps the businesses to increase their revenue in case there are any changes to the pre-agreed terms of the contract.

Creating a Debit Memo

Creating a debit memo is very simple and easy. It is just a similar process to creating an Invoice for the activity performed, work done, or goods sold.

Following are the steps and data are used –

  • Customer’s name, address, and communication detailsYour Company’s name, address, and communication detailsTax Details of your company as well as the other companyItem Description, Quantity, Rate per unit, Total Taxable valueInvoice Number and Invoice dateDetails of the transactionsFinal Invoice Amount including all taxesMode of payments and other payment termsOther terms and conditions

While creating a Debit Memo, it should always be remembered to provide a reference to the Original Invoice raised. It should also include why this Memo is raised, i.e., the reason for issuing it. After creating the debit memo, it is only left to be sent to the party/customers.

Example of a Debit Memo

Andy works for Sandy Toys Inc., a toy manufacturing company specializing in children’s toy manufacturing. Andy has cracked a huge client’s order from abroad for which she has sent the quotation, and upon their acceptance, she Invoiced the price of the toys based on the price list, which was old and for the previous financial year. She has conveyed the same to its customers, to which they have accepted the change in price based on current year prices. Now suggest the ways for Andy to overcome this situation.

Solution:

Considering today’s busy and tight schedules of the employees in the industry, it is common to have made some mistakes by any employee. Now, this is generally a common mistake to which there are simple solutions. First, Andy can raise a new Invoice by canceling the previous invoice by raising a Credit NoteCredit NoteA credit note is a financial document that sellers provide to buyers as a token of confirmation against registered returns. It acknowledges the cancellation and lets the sellers make a credit entry to the buyers’ account for the required amount. read more. The second is that Andy can raise a Debit Memo referring to the Original Invoice and issue this memo with the net change in the price from the previous year to the current year without affecting the Original Invoice already raised.

Debit Memo VS Credit Memo

Both Debit & Credit are just the opposite of each other. Their difference is explained as follows:

  • A Debit Memo is a document that increases the accounts receivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year.
  • read more, whereas Credit Memo is a document that decreases the account receivables.A Debit Memo is to increase the price of Invoice Amounts, whereas a Credit Memo is to decrease the price of the Invoiced Amount.A Debit Memo is raised by the Seller, Service provider, whereas the Credit MemoCredit MemoA credit memorandum, also known as a credit memo, is a document issued by a seller to a buyer that serves as the source document for the sales journal and informs the buyer that the seller will credit the amount owed to the seller.read more is raised by the Purchaser or Service Receiver.

Advantages

The following can be explained in terms of the benefits or advantages –

  • It helps make changes in the Invoice value without issuing a new Invoice.It helps in correcting the mistakes of the wrong invoice raised.It is a document raised by the Seller or provider of service and not the purchaser or receiver of service.

Disadvantages

  • It is again additional documentation in terms of handling.It is additional work for the accounts department to raise documents for the same transaction.

Conclusion

A Debit Memo is a document raised by the accounts to increase the value of Accounts Receivables without affecting the original Invoice Value. It helps to increase the revenue of the business and correct the Invoice Value wrongly raised or shortly raised. It is also raised due to any change in terms of an agreement on the parties’ request.

This article has been a guide to what a debit memo is and it’s meaning. Here we discuss characteristics, for example, and how to create a debit memo along with advantages and disadvantages. You may learn more about financing from the following articles –

  • Debit Balance ExampleDebit DefinitionAccounts Receivable – Debit or Credit?Debit Note vs Credit Note