Debit memos and credit memos are two business documents that represent accounting transactions on sales. They are more commonly known as “debit notes” and “credit notes.” You are more likely to encounter the credit memo than the debit memo and this should interest you more because a credit memo means some of the money you have been charged will come back to you.
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A credit memo is an accounting method of reducing or cancelling an invoice. The reasons they exist is because an invoice should not be modified once it has been printed. An accounts clerk might notice that a newly printed invoice is incorrect, or a customer might call in complaining about an error on the invoice. In both cases, the clerk has two options, wither to cancel the invoice entirely or reduce the amount on the invoice. Both of threes options can be fulfilled with a credit memo. If the invoice has not been sent out, t is better not to let the customer know the company makes mistakes. Write a credit memo for the entire amount, not it in the sales ledger and issue a new invoice for the correct amount. If the customer already has the invoice, then issue the credit memo for the overcharged amount and this will be presented, like a voucher, when the customer comes to pay the correct amount.
A credit memo is also used to refund money to a customer to compensate for defective goods. This may even occur after the invoice has been paid. If a customer buys goods, receives an invoice and pays for them, but then returns the goods, you will have to give him his money back. However, a frequent customer, who intends to buy other goods from you may accept a credit note instead. This means you do not have to pay out cash, but can hold the money on account and deduct it from the same customer’s next purchase. In the books, the first invoice is cancelled by the credit note.
Debit memos are rarer than credit memos. They are like a reverse invoice. In the case of returned goods it is normal for the seller to issue a credit note. However, on some occasions, the buyer issues that notice to reduce the amount of the invoice. This is the debit memo. In this document, the buyer notifies the seller all or part of the invoice for a valid reason. The reduction of the invoice should be agreed by both sides for the debit note to be valid.
As the credit note reduces an issued invoice, a company might issue a debit note to a customer if it realises that it did not charge enough on an invoice. In these circumstances, however, it is more usual to issue a credit note cancelling the incorrect invoice and then issue a new invoice for the correct amount.
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