Credit Memo vs. Debit Memo: What’s the Difference?

If you pay close attention to your bank statements, you may notice an item labelled, “credit memo”, from time to time. But without more information, it’s hard to know what the credit memo is for; why you received extra money in your account. The same goes for “debit memos.” Businesses also issue credit and debit memos for various reasons, which we’ll cover in this article.

What Is a Credit Memo?

A credit memo transaction occurs when money is added to an account. Credit memos are most often associated with banks and other businesses that sell products and services. Banks will issue credit memos for various transactions, including issuing interest on a customer’s savings account balance, crediting a customer for an overpayment, and refunding a bank account fee.

A business that sells goods may issue a credit memo instead of a refund to the buyer when a product is returned. The credit memo should include a written explanation of the transaction, along with a reference number.

Credit Memo Examples

Here are some examples of when a business might use a credit memo:

• The credit of bank service charge or bank fee
• A credit of previous bank charge (mortgage appraisal fee)
• Store credit
• Interest earned
• Bill payment credit
• Shopping credit
• Credit for next purchase
• Offer credits

Other Times a Credit Memo Is Used

Credit memos are often used to correct an error or refund a customer when a product arrives damaged to the shipping address. Rather than issuing a full refund, the business owner will issue a credit memorandum to compensate the buyer.

Credit Memo vs. Refund

At first glance, a credit memo and refund might seem like the same thing, but there’s a difference. Technically, a refund involves a reversal of the original purchase transaction. For example, let’s say you purchase an item of clothing from a local retailer with a 30-day return policy. One week later, you decide to return the item after realizing it doesn’t fit properly.

When you take the item back to the store, the clerk will issue you a refund by reversing the original purchase transaction. Unless it’s in cash, the refund will appear back in your bank account or on your credit card. A credit memo appears as a separate transaction from the original purchase.

Information Found on a Credit or Debit Memo

Businesses will record information on most credit memos to keep track of essential transaction data. For example, a bank issuing a credit memo for a mortgage payment may record the customer’s name, branch, and account number. Here is a list of details often included in a credit or debit memo.

• Payment terms
• Invoice number
• Item description
• Price
• Discount information
• Number of items on the purchase order
• Date of purchase
• Customer’s bank account number
• Financial institution number
• Shipping address

What Is a Debit Memo?

A debit memo is the exact opposite of a credit memo. Instead of a credit to the customer’s account, with a debit memo, funds are withdrawn. Here are a few examples of when a business might use a debit memo:

• Charge for insufficient funds on a cheque
• The debit for a monthly loan payment
• Monthly Chequing account fees
• Credit card Interest charges
• Layaway payments to a business for a purchase

Final Thoughts on the Credit Memorandum

Let’s face it. A credit memo is not something you will think about often. The technicalities of banking, purchase, and sale transactions are best left to your financial institution or a business’s accounting department. Still, it’s good to know what a credit memo or debit memo looks like next time it shows up on your bank statement. It may save you a phone call or a trip to your local branch.