What is a debit note?
A debit note, sometimes referred to as a debit memo, is a document raised by a buyer and used in specific situations where they want to indicate or request a return of funds paid to a seller.
A buyer can issue a debit note in various situations and it is a way to put forward their request for getting a credit note from the seller. It is evidence to support a return of purchase in their accounting books. A buyer can raise or issue a debit note under various circumstances, such as:
- If the goods received are either incorrect or damaged.
- If the seller has charged more than the agreed price.
- If the cost or the description of products mentioned in the invoice is incorrect.
Debit notes are also involved in business-to-business transactions and include details such as the date on which the debit note was issued by the buyer, a serial or unique identification number, description of previous business transaction, details of items returned including sales tax and the signatures of the appropriate company authorities.
Debit notes are different from invoices because they are formatted as letters with the above-mentioned details and, secondly, they may not require immediate payment, as is the case with invoices.
You can also think of a debit note as a claim made by the customer/buyer against a seller, and in the case of returned goods from a vendor, a debit note shows or reflects the change in the purchaser’s books. Since debit notes are raised by the buyer to request funds, it is always shown with a positive or ‘+’ sign in the buyer’s accounts, unlike a credit note which is shown by a minus sign ‘-‘ in the seller’s accounts.
What is a credit note?
A credit note, at times also referred as a credit memo, is a document created by the seller and is used in the situations where an earlier generated invoice needs to be cancelled and is therefore a part of invoicing.
A credit note can be issued under various situations, such as if the amount mentioned in the invoice is overstated or if the discount rate entered in the invoice is not right or if the goods sent by the supplier turn out to be incorrect or damaged; if the buyer is not happy with the product and sends it back to the supplier.
A supplier, if satisfied, will issue a credit note to the buyer: HMRC does not allow you to simply delete or amend an existing invoice. Also, issuing a credit note creates a record of the sale in your accounts while indicating that the order was cancelled (with an applied reason) and funds returned to the buyer.
A credit note is always mentioned and shown in negative ‘-‘. A credit note can also be issued when there is any change to an existing order, which also means that the invoice has to be regenerated or when a customer wants to make some changes in his order i.e. if they want to reduce or increase the quantity of the product or remove either one or more products in one go. Any changes in an existing order demands an edited or modified invoice, however UK law requires the issuing of a credit note.
Comparison chart: debit note versus credit note
A credit note and a debit note are ‘two sides of the same coin’:
|Basis for comparison||Debit note||Credit note|
|Meaning||A debit note isused as evidence to reflect that a debit is made to the seller’s account.||A credit note is an articulated form of sales return; used to reflect that a credit is made to the buyer’s account.|
|Implies…||Purchase return of goods.||Sales return of goods.|
|Issued by…||Buyer/purchaser who returns goods. In many cases the purchased items are returned because of some defect or discrepancy.||The seller’s finance function.|
|Accounting entry||Once the debit note is issued, the supplier account is debited and customer account is credited.||Once the credit note is issued, the supplier account is debited and customer account is credited.|
|Represents…||Positive amount.||Negative amount.|
|Exchanged for…||Credit note.||Debit note.|
|Which book is updated?||Purchase return book.||Sales return book.|
|Result||Purchase account is reduced.||Sales account is reduced.|
|Effect||Reduction in accounts receivable.||Reduction in accounts payable.|
How Nomisma’s bookkeeping software can help to manage debit notes and credit notes for your company?
Our bookkeeping software is enriched with features such as an automated bank reconciliation system and management of credit notes and debit notes, which provide bulk uploads and sending facilities for sales and purchase invoices; reducing the time you spend on bookkeeping tasks.
We offer a 14-day trial package, which can help you get an overview of what our software is all about. Try Nomisma today.
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