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Can you help me to understand credit memo and debit memo in the bank reconciliation?

Author:
Harold Averkamp, CPA, MBA

Definition of Bank Credit Memo

A bank credit memo is an item on a company’s bank account statement that increases a company’s checking account balance.

Examples of Bank Credit Memo in a Bank Reconciliation

A few examples of a bank credit memo appearing in a company’s bank account include:

  • The bank adding interest that was earned for having money on deposit
  • The bank having collected a note for the company
  • A refund of a previous bank charge

Since the amount of the bank’s credit memo has already been added to the bank’s balance, the bank reconciliation will not reconcile unless the amount is also included in the company’s general ledger Cash account. To record the bank credit memo the company will debit Cash and credit another account. For example, if the bank statement shows a credit memo of $20 for interest earned, the company will debit Cash for $20, and credit Interest Income for $20. (The company’s Cash account needs to be debited because its asset has increased.)

Definition of Bank Debit Memo

A bank debit memo is an item on a company’s bank account statement that reduces the company’s checking account balance.

Examples of Bank Debit Memo in a Bank Reconciliation

Some examples of bank debit memos include:

  • Bank service charge for maintaining the checking account
  • A subtraction for a customer’s check that did not clear the customer’s bank account
  • A bank fee for handling a check that was returned for insufficient funds
  • A monthly loan payment

Since the amount of a bank debit memo has already been subtracted from the bank account, the amount must also be subtracted from the company’s general ledger Cash account. For example, if the bank statement shows a debit memo of $25 for a service charge, it means that the company’s general ledger Cash account will need an entry that credits Cash for $25, and debits Bank Fee Expense or Miscellaneous Expense for $25. (The company’s Cash account needs to be credited because the company’s asset account has decreased.)

[The bank debits the company’s bank account balance to reduce the balance because its customers’ account balances are liabilities for the bank. For instance, when the bank records a customer’s deposit, the bank debits its Cash account and credits its liability account Customer Deposits. Hence, when the bank pays a customer’s check, the bank’s cash is reduced and the bank’s liability account Customer Deposits is reduced. The bank records this with a credit to Cash and a debit to Customer Deposits.]

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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