Debit Memo Vs Credit Memo: A Detailed Comparison

What are Credit Memos?

A credit memo or credit memorandum is a document issued to buyers to lower what they owe after receiving an invoice. Basically, it’s like making a small adjustment to the previous invoice issued after the product or service delivery.

Credit memos allow businesses to alter the charges right away without creating a separate invoice or refunding the amount. Such invoice adjustment practices are followed whenever businesses overcharge their guests, potentially due to pricing or discount errors.

They no longer need to scrap an original invoice as the issuer can quickly adjust the amount using a credit memo.

Let’s say you invoice a guest for $110, but later realize you forgot to add a seasonal discount to the total invoice amount. In that case, you can make a credit memo for $15, pulling down the total amount to $95, which is what they now need to pay.

See how to add a credit note using an automated tool.

What are Debit Memos?

A debit memo or memorandum is a document informing the buyer regarding the inclusion of extra charges to a previously shared invoice. Unlike credit memos, debit memos are used to alert buyers about an increase in the amount they owe.

A debit memo allows businesses to include the missing amount, thereby eliminating the need to create a fresh invoice. Such practices are common in the construction and retail businesses, where the issuer often needs to add extra work or update the correct item rate.

Let’s say, for example, you invoiced a client $440. After some time, your team updates you regarding a price hike of $50, which means you can now issue a debit memo for $50, increasing the total outstanding amount to $490.

Credit Memo Vs Debit Memo: Main Differences

Now, let us see what are the main differences between credit memo and debit memo in detail.

When to Issue Credit Memos?

Below are a few instances when businesses can generate a credit note instead of creating a new invoice.

1. Errors in Invoices

Unwanted invoicing errors are common when you rely on a manual approach. Errors like overcharging your buyers leave you no choice but to issue a credit note as early as possible. In such scenarios, generating a new invoice not only buys your time but also makes the billing process a bit longer. That’s where you can satisfy your buyers with a quick credit memo.

2. Return of Goods

Returning sold goods or products is another case where you can issue a credit note rather than designing an invoice from scratch. The credit note confirms that the outstanding amount has been reduced without canceling the original invoice. This practice further aids you in tracking return goods properly.

3. Necessary adjustments

If rendered services do not fulfill the client’s expectations, then a business can create a credit memo to change the billed amount. Sometimes, clients may express concerns about the services provided. To address this and maintain a positive relationship, you can issue a credit memo to compensate for the shortfall in service.

When to Issue Debit Memos?

Turning to the other side, let’s see when a debit memo comes into play.

1. Underbilling

When you realize that the invoice issued doesn’t include the full amount, you can opt for a debit memo to update the invoice amount right away. With a debit memo, the issuer no longer needs to scrap the original invoice, but can make a debit note asking the client to pay additional dues.

2. Work Addons

A debit memo comes in handy when you have provided additional work to align with your client’s expectations. It lets you add more charges to an invoice you already issued to the client. A debit memo highlights the revised amount because of extra work requested from the client’s end, or may be due to unforeseen events.

Best Practices for Managing Credit and Debit Memos

• Communicate clearly: bridge the communication gaps by keeping your clients in the loop whenever you want to issue a debit or a credit memo.
• Give a clarification: Explain the reason behind why you are sharing a credit or debit memo to maintain lasting relationships with clients.
• Prioritize invoice templates: Utilize readymade invoice templates over paper copies for better readability and to avoid post-sale disputes.
• Integrate advanced tools: Get sophisticated software to automate the calculations in order to get rid of small errors and save hours on client billing.
• Oversee approvals: Review and set up guidelines for your internal approval process, especially when the amount is large.

Key Components of Credit and Debit Memos

Here are a few components of credit as well as debit memos that play a role in adjusting the invoice amount.

• Seller & buyer’s details: Type the details of yourself and the buyer whom you want to issue a credit or debit memo.
• Credit note date: Insert the date on which the credit or debit memo is created to keep your internal records up to date.
• Currency: Opt for the buyer’s preferred currency when you make an online credit memo or a debit memo.
• Invoice number: Include a correct invoice number whenever you make a new credit or debit memo.
• Special terms: Write about terms and conditions, like how you collect the payment and available payment modes.

Debit Memo Vs Credit Memo: Final Thoughts

For businesses, understanding the difference between credit memos and debit memos matters the most. Because issuing a credit or debit memo isn’t just about satisfying clients or recovering the additional amount. It is a part of your invoicing process that helps you promote transparency and maintain clear internal records.

When you start managing funds smartly with automated tools like Moon Invoice, your business thrives and results in the desired growth. Want to try it first-hand? Start your 7-day free trial now and figure out how Moon Invoice can inspire your finance team to work smarter.

Credit Memo vs Debit Memo FAQs