What is a bank debit memo on my bank statement, and how do I record it in the books?

What is the bank telling you with a debit memo?

A debit memo is an item the bank has posted to reduce your balance that did not come from a check you wrote or a payment you sent for that specific item. It is either a charge the bank itself put through, such as a fee, or an amount the bank took under a standing arrangement, such as a loan payment. A bank creates a debit memo when it charges a company a fee on its bank statement, thereby reducing the balance in the company's checking account. Put simply, it is an item on your statement that lowers your checking account balance.

The word "debit" can look backwards if you think of cash as an asset. From the bank's side, your deposit is money it owes you, so your balance is a liability on the bank's books. A liability goes down with a debit, so the bank debits your account when it takes money out. On your books, the same event reduces cash, and cash is reduced with a credit. So the bank's debit memo becomes a credit to cash in your ledger.

The key point is that the charge has already happened. The money has left the account. The memo is not a bill waiting to be paid and not a warning. It is a report of something the bank has done that your records do not show yet.

Why do banks issue debit memos?

The fastest way to decide how to record a debit memo is to put it into one of four classes. Each class goes to a different account, and one of them gets no entry until you know more.

1. Charges for the bank's own services or for running the account. This is the most common class. Typical examples are bank service charges, bounced (not sufficient funds) check fees, charges for printing check stock, and rental fees for remote deposit capture scanners and software. A monthly maintenance fee fits here too, since banks often charge each month for managing the account.

2. A charge from a third-party transaction that the bank passes to your account. The bank is acting as the channel, not the beneficiary. A loan payment the bank takes by arrangement is one example. Here the memo usually settles something your books already know about, such as a loan balance or an agreed payment, rather than creating a new expense.

3. A bank correction of something it posted earlier. Banks make errors. For example, the bank might report a check either with an incorrect balance or in the wrong client's checking account. A bank may correct such an error with a further debit to your account; when it does, look back at what it corrected before deciding whether your books need anything.

4. A charge you do not recognize. If you cannot place the item in any of the first three classes, do not code it anywhere yet. The section on unrecognized charges below covers what to do.

Returned customer checks and electronic payment items also reduce your balance and can show up next to debit memos. Each has its own treatment, which is covered separately.

How do you spot a debit memo on the statement?

Scan the withdrawals or debits column and set aside anything you did not initiate. Your own checks carry check numbers you issued. Your own transfers, card purchases and bill payments name payees you chose. Set aside any withdrawal that carries no check number you issued and no payee you chose.

Two things do not belong in this group. The first is your own payments: if it matches a check or transfer you made, it is not a debit memo, even if the wording is unfamiliar. The second is items that run the other way. A credit memo, such as interest the bank paid or a collection it made for you, increases your balance. Bank-originated credits are recorded differently, and that treatment is covered separately.

If a line is ambiguous, check your own bank's statement guide or the transaction detail in online banking.

How do you find out what the charge was actually for?

Do this before you record anything. A statement description is abbreviated and generic. If you code the charge from the description alone, you are guessing, and in three months nobody will remember that it was a guess.

Work through these in order:

1. Open the transaction detail in online banking. It may carry a longer description, a reference number or a link to a notice.
2. Look for a notice from the bank. Check your mail, secure messages and statement inserts. If the bank sent a notice or itemized the fee, that is the best record of what you were charged for.
3. Check your own recent actions against it. Did you order checks, rent a deposit scanner, deposit a check that bounced, or go below a minimum balance? Is a loan payment scheduled to come out of this account?
4. Ask the bank. If you still cannot tell the cause, contact the bank and ask, in writing if you can, what the charge was for, which service or transaction it relates to, and for a copy of any supporting notice. Keep the answer.

When you finish, write the cause in one line. For example: "check stock order, 2 boxes" or "monthly account maintenance fee, balance below minimum." That line goes into the entry's memo field, and it lets the next person who sees the entry understand it without redoing the investigation.

Is the charge already in your books?

Check this before you create anything. It depends on the cause and on whether a bank feed is bringing transactions into your accounting software.

The charge exists only on the statement. Most bank fees fall here. Nothing in your books relates to them, so you create a new entry.

The charge settles or adjusts something already recorded. A loan payment, or a bank correction of an earlier posting, relates to records you already have. Find the existing record first. The entry should reduce the loan balance or undo the specific earlier item, not create a fresh expense. If you make a new expense entry here, the charge is recorded twice.

A bank feed already brought it in. If your software downloads bank transactions, the debit memo may already sit in the books as an unreviewed, uncategorized or provisional transaction. Your job then is to categorize that existing transaction, not to add a manual entry. Search the cash account for the amount and date before you post anything. A charge entered by hand while the feed also brings it in lowers cash twice and overstates the expense by the same amount. How to match feed items and remove duplicates is covered separately.

Which account does the charge go to?

The cause decides the account. No single "bank charges" account is right for every debit memo, and parking the charge in a general or suspense account without establishing what it was for leaves the expense unclassified. It can also make a reconciliation look finished when it is not.

Use the cause you established:

• Bank service and account-operation charges (maintenance fees, per-item fees, overdraft penalties) go to a bank service charges or bank fees expense account.
• Charges for something you bought through the bank, such as check stock or a deposit-scanner rental, go wherever you normally record that kind of spending. That may be bank fees, office supplies or equipment rental, depending on your chart of accounts. The rule is consistency: treat the same kind of charge the same way every time.
• Third-party transactions passed through the bank go to the account for the underlying transaction, not to bank fees.
• Bank corrections follow what was corrected. If the bank's original error never reached your books, the correction just returns the bank to what your books already showed, and it needs no entry. If you did record the original item, reverse it.
• Unrecognized charges get no account until the cause is known.

For charges that come every month, such as a maintenance fee, set up a memorized transaction or a bank rule in your software once the cause is established. Then later occurrences are categorized the same way without a new investigation. Watch whether the amount changes, because a changed amount is a new question.

What does the entry look like?

The rule is simple: bank charges on the statement that your company has not recorded yet are entered as expenses, and your cash balance is reduced by them. Transactions the bank knows about but your company does not must be journalized in your records. The entry credits cash and debits the account you chose from the cause.

A worked example, with invented figures:

On June 30 the statement shows an ending balance of 18,420.00. Your ledger shows cash of 18,465.00, and every other item on the statement already matches your records. One line dated June 26 says only "DEBIT MEMO 45.00". It has no check number, and it is not a payment you made. Online banking shows the bank's notice: a charge for a check-stock order you placed on June 20. Your bank feed has not brought the item in, and nothing in the cash account for June matches 45.00. The charge exists only on the statement, so you create an entry. Your policy puts check stock in office supplies.

Memo: "Check stock order June 20; bank debit memo June 26; bank notice attached."

After posting, the ledger cash balance is 18,465.00 − 45.00 = 18,420.00. That agrees with the statement's ending balance, and the 45.00 difference is gone because the item now exists on both sides.

If the same memo had been a 45.00 monthly service fee, the entry would look the same except that the debit would go to bank service charges. If it had been a loan payment, the debit would go to the loan and interest accounts, and you would first check that the payment was not already recorded from the lender's schedule.

Which period do you record it in?

Record the item in the period the bank posted it, because that is the period in which the bank's balance already reflects it; a book entry dated in a later period leaves that period's cash out of agreement with the statement. Within the period, the most precise date is the posting date shown on the statement line, not the day you noticed it.

The posting date is in a period still open in your books. Record it with that date, even if you are working on it weeks later. In the example, the entry is dated June 26 even if you find the memo in mid-July, as long as June is still open.

The posting date is in a period you have already closed. Stop before you post. Backdating into a closed period changes figures that may already have been reported, while posting in the current period leaves the earlier period's cash out of agreement with that statement. Which of these to do is a policy decision for closed periods, covered separately. Settle it before you record the item, so that both periods' reconciliations can still agree.

Why can't you just list it on the reconciliation and move on?

A debit memo is not a timing difference that will clear on its own. An outstanding check eventually reaches the bank and the difference disappears. A debit memo is the opposite: the bank has already recorded it, and your books never will unless you post an entry. It is an omission on the book side.

If you only list it as a reconciling item and never post it, three things follow. Your ledger cash stays overstated by the amount. The expense is missing from your records. And the same unexplained difference comes back every month, joined by each new memo you treat the same way. After a few periods, nobody can tell which old item the leftover difference comes from. Post the entry in the period it belongs to, and the item stops showing up in later reconciliations.

What if you do not recognize the charge?

Do not post it to an expense account or a holding account and move on. That turns an unexplained bank action into what looks like a settled book entry, and the chance to question it slips away.

Instead, keep the item open on a short list of unresolved statement items with the date, amount and description. Go through the investigation steps above, and contact the bank promptly to ask what the charge is. If the bank's answer places it in one of the first three classes, record it as described. If the charge turns out to be unauthorized, or you want to dispute it, follow the steps for disputed and unauthorized payments, which are covered separately. Bank transactions you cannot identify at all are also covered separately.

What document supports the entry, and how long do you keep it?

You did not create the source document for this entry; the bank did. Supporting documents contain the information you need to record in your books. For an expense, that means documents that identify the payee, the amount paid, proof of payment and the date incurred, and that include a description of the item purchased or service received showing the amount was for a business expense. Account statements are among the accepted types. For a debit memo, keep:

• The bank statement showing the line.
• The bank's notice, fee statement or written reply describing the charge.
• Any record of your own that it relates to, such as the check-stock order or the loan schedule.

Attach these to the entry, or file them where the entry's memo points. How long you keep them depends on the action, expense or event the document records. For records that support income, deductions or credits on a tax return, you generally keep them until the period of limitations for that return runs out; the IRS lists the periods of limitations that apply to income tax returns.