What is a debit memo?

Definition

A debit memo is a follow-on billing document sent after the original bill already went out. It tells the other party that the open balance needs to go up.

On the seller's books, the customer version increases accounts receivable. The extra amount is usually extra revenue, a delivery charge, or a cost that should have been on the first invoice.

The vendor version works from the other side of the table. A supplier sends one when you still owe more, so accounts payable rises by that extra amount.

Where it shows up

Balance Sheet: Located in the current assets section, as an increase to the receivable.

P&L: Related to the extra charge the memo bills.

Cash flow: Related to nothing extra until that extra amount collects.

See also: Credit Memo · Invoice · Accounts Receivable

When you look at the Balance Sheet, you will not find a line with this document's name. You will find a larger receivable sitting in current assets if a customer was billed.

On the Income Statement, the extra charge usually lands in the period the memo is issued. Delivery income, service income, or another revenue line is the typical home.

The Statement of Cash Flows does not move when the memo is sent. Cash from operating activities rises only later, when the extra amount actually collects.

In the billing file, the memo lives next to the original invoice. Together they explain why the customer's open balance is higher than the first bill.

How it works

The process starts when someone notices the first invoice left something out. Freight, a rush fee, tax, or a missed item is the usual reason.

The seller then issues a numbered debit memo tied to that invoice. The memo states the extra amount, the reason, and which original bill it belongs to.

The books debit accounts receivable and credit the income or recovery account for that extra charge. The original invoice stays on the books at the amount it already showed.

The customer's open balance is now the invoice plus the memo. Both stay open until cash comes in against them.

On the vendor side, a supplier's debit memo increases what you still owe. You debit the expense or asset that the extra charge belongs to, and you credit accounts payable.

Nothing about the document is a payment. It is only the paper and the journal that raise the open balance.

If the customer disputes the extra charge, the memo can be reversed later. Until then, the receivable includes that extra amount.

Example

A florist already billed a neighborhood cafe for weekend arrangements. After the van left, the cafe asked for same-day delivery that was not on the original invoice.

The florist sends a debit memo for $40 of delivery. The books record the extra charge this way:

Debit: Accounts receivable $40

Credit: Delivery revenue $40

Accounts receivable rises by $40. Delivery revenue rises by $40 on the Income Statement.

No cash moves at that moment. The cafe now owes the original invoice plus this $40.

When the cafe later pays the arrangement and the delivery together, cash goes up and the receivable comes back down. That collection is a separate event from issuing the memo.

Common mix-ups

A debit memo is not a credit memo. A credit memo lowers what the customer owes, and a debit memo raises it.

A debit memo is not a brand-new invoice for a brand-new job. It adjusts a bill that already went out, while a fresh order should get its own invoice.

A debit memo is not cash in the door. Issuing the document only changes the receivable or the payable, and cash changes when the extra amount is collected or paid.

A debit memo is not a write-off. A write-off removes a balance that will never be collected, and this document adds to a balance that is still expected to be paid.

Related terms

• Credit Memo: A document that reduces what a customer owes.
• Invoice: The document that bills a customer and creates a receivable.
• Accounts Receivable: Money customers owe the business for goods or services already delivered.
• Vendor Bill: The invoice a supplier sends that becomes a payable.
• Accounts Payable: Amounts the business owes vendors for goods or services already received.
• Late Fee: A charge added when an invoice is paid after its due date.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• Statement Of Account: A summary sent to a customer listing all open invoices and payments.