Credit Memo Definition, Illustration, Accounting

A credit memo, also known as a credit memorandum, is a document issued by a bank to indicate an increase in a customer’s account balance.

What is a Credit Memo from the Bank?

A credit memo, also known as a credit memorandum, is a document issued by a bank to indicate an increase in a customer’s account balance.

When a bank issues a credit memo, it is essentially notifying the account holder that their balance has been credited for a specific reason.

Credit memos are important for businesses to understand and properly account for in their financial records.

Banks issue credit memos for various reasons, such as:

• Interest earned on deposits
• Refunds of previous bank charges or fees
• Collection of notes receivable on behalf of the account holder
• Adjustments to correct errors in the account

The following table summarizes the key differences between bank credit memos and debit memos:

Feature	Credit Memo	Debit Memo
Impact on account balance	Increases balance	Decreases balance
Common examples	Interest earned, refunds, note collections	Service charges, bounced check fees, loan payments
Accounting treatment	Debit Cash, credit relevant income account	Credit Cash, debit relevant expense account

Illustrations of Bank Credit Memos

There are several common reasons why a bank may issue a credit memo:

1. Interest earned on deposits: When a company has funds in an interest-bearing account, such as a savings account or a certificate of deposit (CD), the bank will periodically credit the account with the interest earned. This credit will be reflected as a credit memo on the account statement.
2. Bank collecting a note for the account holder: If a company has a note receivable that the bank has collected on their behalf, the bank will issue a credit memo to indicate that the funds have been deposited into the company’s account.
3. Refund of previous bank charges: If the bank determines that certain charges or fees were applied to the account in error, they may issue a credit memo to refund those charges and restore the account balance.

Other reasons for bank credit memos may include:

• Adjustments to correct errors in the account
• Reversal of previously charged insufficient funds fees
• Deposits made directly to the account by third parties

Does credit memo means refund?

A credit memo from the bank can sometimes indicate a refund or increase in your bank balance.

More often than not, however, a credit memo represents interest income, fund transfers, or other transactions that boost your account balance.

In some cases, the credit memo may even correct bank errors, such as checks processed with debit amounts exceeding the actual check value.

Is a credit memo good or bad?

To maintain a smooth business flow, it’s essential to have accurate and clear records.

A credit memo is considered good news for the depositor when it increases their bank balance, effectively providing a positive financial outcome.

Nevertheless, the situation becomes challenging if the bank fails to provide the necessary details about the credit memo, leaving the bookkeeper uncertain about how to record it in the depositor’s accounts.

Accounting for Bank Credit Memos

When a company receives a credit memo from their bank, it is essential to properly record the transaction in their accounting system.

This process is crucial for maintaining accurate financial records and ensuring that the company’s books reconcile with the bank statement.

Impact on Bank Reconciliation

Bank credit memos have a direct impact on the bank reconciliation process.

When a credit memo is issued, it increases the balance of the company’s bank account.

However, if the company does not record this increase in their general ledger, there will be a discrepancy between the company’s records and the bank statement.

By properly recording credit memos in the general ledger, companies can streamline the bank reconciliation process and avoid potential discrepancies.

Journal Entry to Record

When a company receives a credit memo, they must record a journal entry to reflect the increase in their bank account balance.

The specific accounts used in the journal entry will depend on the reason for the credit memo.

The general format for recording a bank credit memo is:

Account	Debit	Credit
Cash in Bank	X
Interest Income, Other Income, or relevant account		X

For example, if a company receives a credit memo for $100 in interest earned on their savings account, the journal entry would be:

Account	Debit	Credit
Cash in Bank	$100
Interest Income		$100