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What is a Debit Memo and Credit Memo in Accounts Payable?

By Athena Rebello

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Updated on: Apr 8th, 2024

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5 min read

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Credit and debit memos are documents like invoices that help to fix any mistake in charges or bills.

This article will discuss how debit and credit memos are crucial in keeping your accounts in line and your business running smoothly.

What is a Debit Memo in Accounts Payable?

This is a document from a seller indicating the buyer owes the seller more money. This debit could be for various reasons, such as adjustments to an invoice, corrections to pricing or quantities, or additional charges. 

What is a Credit Memo in Accounts Payable?

This is a document from a seller indicating that they owe the buyer a certain amount. This could be because the buyer has returned an item, was overcharged, or another reason. 

Difference Between Credit Memo and Debit Memo in Accounts Payable

AspectCredit MemoDebit Memo
PurposeReduces the amount the buyer owes to the sellerIncreases the amount the buyer owes to the seller
Effect on Accounts PayableDecreases Accounts Payable (buyer's perspective)Increases Accounts Payable (buyer's perspective)
Typical Reasons for IssuanceReturned goods, billing errors, discounts/rebates after invoicingAdditional charges, services not provided as agreed, invoice adjustments, price or quantity changes

How to Use Debit Memos and Credit Memos in Accounts Payable?

Using debit memos and credit memos effectively in accounts payable involves understanding their functions and implementing them to adjust financial transactions accurately. Here’s how they can be used in practice:

Using Credit Memos

  • Correct Overcharges: Credit memos are used to reduce the amount owed due to overcharges or returns.
  • Apply Discounts: They can be used to account for late discounts or rebates.
  • Record and Reconcile: Credit memos must be entered and reconciled with corresponding invoices for effective accounting.

Using Debit Memos

  • Address Undercharges: Debit memos increase the payable amount for undercharges or additional services.
  • Communicate: Buyers must be notified about the adjustment for mutual agreement.
  • Update Records: Debit memos must be entered and reconciled with corresponding invoices for effective accounting.

Managing debit and credit memos well is key to keeping business finances clear and correct. Making this process smoother helps avoid mistakes and keeps a company's money matters stable and in good shape. 

About the Author

A Chartered Accountant by profession and a writer by passion, my expertise extends to creating insightful content on topics such as GST, accounts payable, and invoice discounting.. Read more

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