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What are Debit, Credit Note and their Formats?
You might be well aware of the term statement or bill or bill of materials. An invoice is used to maintain a record of sales. So, what happens when there is a change in the value of those invoices. Will you go about editing those invoices? It does not make sense to do so. You have already generated the invoice and recorded those transactions in the journal.
The only way out is to make additional entries that indicate a change in the original invoice value and provide a document for further proof of the actual value of the sale made. These documents are called credit and debit notes.
In the sections that follow, we shall understand what debit note and credit is. We would also learn what should be mentioned within the debit note and credit note and what should be the format of a debit or credit note? Glance through a few examples of debit notes and credit notes.
Debit Note And Credit Note Explained
What is a debit note?
A debit note is also known as a debit memo. It is a document that is issued from a buyer to a seller indicating a request to return funds as a result of incorrect or damaged goods or services or cancellation of purchase. A debit note is issued before a credit note can be issued by the supplier and acts as a buyer’s formal request to issue a credit note.
A debit note can be issued by a buyer to the seller requesting the return of the partial or whole amount of payment already made. It could be due to incorrect or damaged goods received or cancellation of the order, or other special circumstances. A debit note serves as evidence of a purchase return in the buyer’s accounting books. On the other hand, a credit note is proof of a sales return.
It is issued when, as a Client , you receive goods or services that may not be of expected standard while you are in receipt of the final invoice from the seller. As a buyer of goods from a supplier, if you would like to return the purchased goods for any valid reason, you can issue a debit note.
Some common reasons for issuing debit notes:
Let’s look at a debit note example.
Company A is the purchaser, and Company B is the seller or supplier. The sequence of events below will lead to the issuance of a debit note.
Let’s look at another example where a credit note is raised by a supplier against a buyer.
Continuing with our companies, the following list of events results in a credit note being raised by the supplier or seller against a purchaser.
Let’s take a look at the definition of debit note from a GST view.
As per section 34(3) of the Goods and Services Tax Act, “Where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient a debit note containing such particulars as may be prescribed”.
As per GST, there are only 2 scenarios where a seller or supplier can raise a debit note-
What is a credit note?
A credit note is also known as a credit memo. It is a document that is issued by the seller to indicate a full or partial return of funds. It may arise in the event of an incorrect or damaged supply of goods, cancellation of a purchase or an invoice error. It is usually raised in response to a debit note from a customer. This document can also be used by the customer or purchaser against a future order.
As long as the total invoice amount is not exceeded, you may issue multiple credit notes.
Some common reasons for the issuing credit notes:
There are 2 types of credit notes, based on where it is applicable.
Let’s take an example of a credit note.
Company A is the purchaser, and Company B is the supplier. Company A places Rs.10000 worth of order from Company B. After sampling the delivered goods, company A informs company B about the low quality of goods detected in the sample. Company B verifies the sampled items to confirm the defects and issues a credit note against the original invoice for the amount mutually decided on.
In such cases, the original invoice can be cancelled against the credit note issued, and a corrected invoice can be raised. This credit note may be used by Company A for further purchases from company B in the future. A refund of the amount may also be agreed on.
Details to be included in a debit note and credit note.
Debit note and credit note are issued when certain goods are returned to the seller by the customer. Through a debit note, the customer lets the seller know that s/he is returning certain goods bought by them. The credit note, on the other hand, lets the customer know that the money for which the debit note was sent, is being returned.
There are some prescribed details to be mentioned on a credit or debit note; they are: