A debit memorandum, or debit memo for short, is notification from a buyer to a seller that tells the seller that a debit was made in the seller's account on the buyer's books. Sounds confusing, doesn't it. To put it simply, a debit memorandum is a way for a buyer to inform the seller that it wants a refund or discount on its purchase.
Many times when companies buy inventory from vendors the inventory is damaged in shipping or the wrong inventory is shipped. In either of these cases, the buyer has the right to return the damaged or incorrect inventory for a full refund. Sometimes returning the full shipment isn't always feasible. For instance, the damaged inventory might only be 10 percent damaged and still in usable condition. The incorrect inventory might be inventory that the buyer needs; it just wasn't what they ordered. Also, the buyer might need the inventory today. It can't wait another week for any shipment to arrive. In these situations, the buyer will most often keep the damaged or incorrect inventory and ask the seller for a discount, purchase allowance, or partial refund on the order.
To apply for this discount, the buyer will issue the seller a debit memorandum. The debit memo notifies the seller than the buyer has received nonconforming goods, wants to keep them, and is debiting its payable account for the discounted price. When the buyer debits its accounts payable, it is reducing the amount of money that it owes the seller in the buyer's accounting system. The seller can then agree to the debit memorandum and adjust its accounts receivable for the discount as well.
Keep in mind, a debit memorandum is a debit to the sender's accounts payable and a credit to the receiver's accounts receivable.
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