Debit Note Meaning

A debit note is a confirmation document sent by a buyer for returning

purchased goods or services to a seller. If all or a percentage of goods have
defects, buyers send this memo. A note is also sent when the buyer is
overcharged for the goods.
This document is crucial for business-to-business transactions. Sometimes sellers
also send such a note stating the buyer’s debt obligations. Both the parties issue
documents to rectify incorrect values in the invoice. Usually, debit notes are
issued when goods are purchased on credit.
Table of contents

 Debit Note Meaning

o Explanation
o Features
o Debit Note Format
 Debit Note Accounting
o Debit Note Example
o Frequently Asked Questions (FAQs)
o Debit Note Video
o Recommended Articles

Key Takeaways

 A debit note is a document released by a buyer for returning goods bought on

credit. Debit notes are also called debit memos.
 In addition, it is used for various other purposes like a rectification of a wrong
invoice, change in order quantity, change in taxes, etc.
 The document becomes valid only upon acceptance.
 Notes sent by buyers contain crucial details—the reason for return, quantity,
price, and the number of goods returned .

Explanation
A debit note is also known as a debit memo. So, buyers send debit memos to
sellers if they return the goods or service. It is, therefore, an official, articulated
form of a purchase return. Buyers inform the seller that they are returning the
goods and mention their reasons. Further, when buyers receive debit memos,
they approve them and then send back a credit note.
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Alternatively, sellers also send debit memos to buyers—informing the buyer of

pending debt obligations.

Now, let us understand the reasons for issuing debit memos. A buyer issues a
debit memo to initiate purchase return for goods procured on credit when:

 The goods delivered by the supplier are not up to the mark—defective, damaged,
or inappropriate in size, shape, or quantity;
 The supplier fails to deliver the goods or services on time;
 Goods or services are overbilled—calculation errors;
 Higher taxes are applied on goods or services;
 The buyer no longer wants to make the purchase.

A seller also issues a debit memo under the following circumstances:

 When seller requires adjustments in the invoice;

 When the seller changes (increases) the billing amount;
 When the buyer Increases the order quantity;
 To remind the buyer of their current debt obligations.

Features

To understand what exactly a debit note is, we will look at some of its most
significant features:

 Issued on Credit Purchase: When goods or services are purchased on credit, a

debit memo accompanies.
 Issued by Buyer or Seller: Buyers send this document to a seller, listing out
details of the purchase return. Vendors also issue this document when invoices
contain mistakes.
 Requires Acceptance: The document becomes valid only when the sellers
accept the debit memos—sellers make necessary changes in their books of
accounts.
 States the reason: in the debit memo, the buyer clearly mentions the reason
for returning the goods.
 Shown in Purchase Return Book: This note reduces the buyer’s credit
purchase amount and increases the purchase return figures. In accounting
entries, the purchases are debited, and purchase returns are credited.
 Reduces Buyer’s Debt Obligation: From the buyer’s perspective, the debit
memo is a positive amount that will curtail their liability towards the seller.

Debit Note Format

A debit memo comprises the following details:

1. Company name (Issuer);

2. Issuer’s address, zip code, phone number, and web address;
3. Date of creating the debit memo;
4. Order number for which it is issued;
5. Date of placing the order;
6. Order terms and conditions;
7. Customer Id—as stated in the invoice;
8. Company name (Buyer);
9. Buyer’s address, zip code, phone number, and email id;
10.Name of contact person (Buyer);
11.Invoice details—item name (goods or services), item description, the reason for
debit, quantity, price, and total amount;
12.Approval details— date, name and designation, and signature of the issuer’s
representative.

Debit Note Accounting

Now, let us find out the accounting entries in the books of buyers and sellers.
When a buyer purchases goods on credit and then returns them, the following
entries are made:

In the buyer’s books of accounts:

Earlier, the buyer had debited the Purchase A/c and credited the Supplier’s A/c.
Therefore, upon return of some or all of the goods, the supplier will debit the
Supplier’s A/c (reduction in the debt obligation) and credit the Purchase
Return A/c.
The adjusting entry would be as follows:

When the goods are received at the seller’s end, their books of accounts show
the following:

To understand the above entry, we need to have a look at the following adjusting
entry:

As there is a reduction in the credit sales due to the return of sold goods, the
Sales A/c is debited. Also, the Sales Return A/c is credited. Similarly, in the
above accounting entry, the Sales Return A/c is debited, and the Debtors A/c is
credited owing to a decrease in receivables for the seller.
Debit Note Example

Let us assume that MNC Ltd has bought goods worth $40,000 from S&S Traders.
Upon delivery, MNC Ltd found out that 2% of the total goods purchased are
defective. The company issues a debit memo stating the same. What would be
the journal entry in MNC’s books of accounts?
Solution:

Let us start with the calculation of purchase return:

Purchase Return = 2% of Total Purchase Value

Purchase Return = 2% of $40000 = $800

Journal Entries:

In the books of MNC Ltd (buyer):

Particulars Dr. Cr

Purchase A/c …. Dr To S&S Traders A/c 40000 – –4

Particulars Dr.

Purchase Return A/c …. Dr To Purchase A/c 800 –

 S&S Traders A/c …. Dr To Purchase Return A/c 800 –

In the books of S&S Traders (seller):

Particulars Dr. Cr.

MNC Ltd A/c …. Dr To Sales A/c 40000 – – 40

Particulars Dr.

Sales A/c …. Dr To Sales Return A/c 800 –

Sales Return A/c …. Dr To MNC Ltd A/c 800 –

Frequently Asked Questions (FAQs)

What are Debit Notes?

A debit memo is a document that a buyer issues to the seller in case of a
purchase return. Alternatively, sellers send a memo to buyers when they want to
rectify an understated invoice.

Are debit notes and invoices the same?

A debit note is a written declaration of a purchase return issued by the buyer and
sent to the seller. In addition, the document mentions the reasons for returning.
On the contrary, an invoice is an itemized bill issued by a seller and sent to a
buyer—upon completion of a sales transaction.

When is a debit note issued?

A buyer releases a debit memo for return or cancellation of goods or services
owing to:
• Delivery of defective, damaged, or wrong goods;
• Overbilling of goods or services;
• Excess taxes applied on goods or services;
• Non-delivery of goods or services on time;
• Supplier’s incompliance to the buyer’s terms and conditions.

A seller issues a memo for:

• Revising the billing amount;
• Notify the buyer’s present debt obligation;
• Change in the order quantity.
 Credit Note Meaning
A credit note is a financial document that sellers provide to buyers as a token of
confirmation against registered returns. It acknowledges the cancellation and
lets the sellers make a credit entry to the buyers’ account for the required
amount. Besides, it records the returned goods as return inwards for further
processing or adjustment of the balance.

Also referred to as credit memos, these are issued after the invoices are
prepared. However, there is a need to cancel either all or part of the orders
returned in the process. Furthermore, this entry indicates crediting the buyers’
account in the accounts book of the sellers.
Table of contents

 Credit Note Meaning

o How Do Credit Notes Work?
o When To Issue Credit Notes?
o Example – Credit Note Accounting
o Features
o Credit Note vs Debit Note
o Frequently Asked Questions (FAQs)
o Credit Note Video
o Recommended Articles

Key Takeaways

 A credit note is a commercial document issued by sellers to buyers to confirm

sales returns.
 The amount that buyers are liable to pay is either less than or equal to the cost
of the order.
 The credit memos are recorded in red ink to indicate a liability or reduced sales
on the supplier or seller side.
 Buyers can also issue these notes if they are undercharged or paid less than the
invoiced amount.

How Do Credit Notes Work?

A credit note is a commercial instrument that sellers issue to purchasers

whenever they return goods bought on credit. This note acknowledges and
notifies the suppliers to update the accounts book accordingly. As soon as the
buyer returns the items, the seller recognizes them with a receipt, which
indicates the entry of the same on the credit side of the buyer’s account.

The entry of this amount into the purchasers’ record signifies a

reduction in the amount payable by customers or buyers. This is because
they already returned the items and are no more liable to pay for the same. If
the due amount is zero at that point, the purchasers get an opportunity to adjust
the cost of the returned items against the next purchase.

When To Issue Credit Notes?

 As already stated, a party issues a credit memo when the other party cancels the
order or returns an item, making suppliers or sellers record the same as a credit
entry into the account books.

The purchasers might cancel or return all goods or only a part of the order. Here
are a few other reasons to check when the credit note is issued:

 To maintain goodwill and the seller-buyer relationship remains strong and

transparent
 Goods returned due to quality issues, defects, or service rejection
 Higher charges collected from buyers
 The buyer paid more than the amount invoiced
 After-sales buyer discount
 The customer received an amount lower than the invoiced amount

Example – Credit Note Accounting

Company A buys goods worth $20,000 from Amazon but finds that 1% of them
do not meet the quality standards. So, the company issues a debit note stating
the same. So, let us check what Amazon’s journal entry in the books of accounts
looks like.
The journal entry signifying a credit note format looks like –

Sales A/C …….Dr 200

To Company A 200

The full version of the credit note example in the form of journal entries made
pre and post-issuance of this note:

Company A A/C………Dr 20,000

To Sales A/C 20,000

Sales A/C………..Dr 200

To CompanyA A/C 200

Sales Return A/C………Dr 200

To Sales A/C 200

Features
 While sellers normally issue the credit memos to buyers against the returns they
register, it might be a vice-versa scenario. The buyer can also issue a credit
memo to sellers if undercharged or paid less than the invoiced amount.

Besides the point mentioned above, here are a few more traits that a credit
memo exhibits:

 Suppliers/sellers record it in red ink to mark reduced sales and liability.

 A credit memo is a gesture of goodwill.
 The sales return book changes as per the reduced sales of defective goods
 A credit memo is an acknowledgment note that keeps the buyer-seller
relationship transparent.
 It specifies the number of goods or items returned.

Credit Note vs Debit Note

A credit memo is a financial document provided to buyers to acknowledge

their registered returns with the sellers or suppliers. This note signifies the
acceptance of the sales returns. The customer account gets a credit entry, and
the sales return becomes a debit entry in the supplier’s account.
On the other hand, a debit note is a document buyers provide to sellers to notify
them of the returns and the reasons behind it. As a result, the supplier account is
debited, and purchase returns are credited to the buyer’s accounts.

Let us explore an example to understand the difference between credit note

and debit note:

Suppose a seller supplies goods to a buyer along with a tax invoice. Upon
receiving the order, the buyer finds faults in the products and returns the same
to the seller with a debit note. The supplier accepts the debit note and prepares
a credit memo, handed over to the buyers as an acknowledgment. This is how it
works.

Frequently Asked Questions (FAQs)

What is a credit note?

It is an acknowledgment instrument that sellers provide to buyers when they
return all or a portion of an order. It notifies both sides of the reduced sales of
the supplier or sellers and lets them know the amount the buyers are eligible to
receive against the returns. Here, the customer/buyer account is credited, and
the sales returns are debited in the supplier’s account.

When is a credit note issued?

It is issued in the following scenarios:

· Goods are returned due to quality or other issues

· To maintain the seller’s goodwill
· Buyers underpaid or overpaid
· Post-sales discount introduced, etc.

Is a credit note a refund?

A credit memo is not a refund or monetary exchange. Instead, it acts as a
voucher that could be used to adjust or balance the required amount in future
dealings or invoices.