In accounting terms, credit memo and debit memo terminologies are usually used. If you’re not acquainted with accounting terms, you might not fully understand what these terms mean and their uses. The objective of this article is to explain clearly the meaning and uses of both terms.
Credit memo and debit memo are related to accounts receivable and accounts payable, respectively. When a company sells to a customer, normally it’s sales on credit. Basically, sales on credit attracts more buyers to buy goods and services, compared to cash sales. The sales on credit transactions should be recorded in the books of the company as accounts receivable which may be due in certain days from the date of sale depends on the terms granted to the customer.
On the other hand, if a company is the buyer it prefers to purchase on account (credit). The money could be used for more liquid activities rather than instantly paying the supplier. For purchases on account, accounts payable to supplier should be recorded in the books. The liability may be due in certain days depends on the credit term granted by the supplier.
Credit memo is a transaction where an accounts receivable from a customer is reduce. Upon receipt of notification that certain goods are damage and with poor quality, you prepare a credit memo. A credit memo is a document indicating that you’re crediting (reducing) the account of the customer. E.g. the sales price is 100 and the allocated value of damage goods is 10, the remaining receivable is only 90. Hence, the effect of credit memo is to reduce the balance of accounts receivable.
A debit memo is a note informing the suppliers that a certains goods purchased are damaged or not in accordance with the prescribed quality agreed. The effect of a debit note is to decrease the amount of payable to suppliers. You prepare a debit memo to inform your supplier that you’re debiting (reducing) your liability.
An accounting software should have the functionality to handle credit and debit memo transactions. SAP system handles the two transactions smoothly and perfectly.
