Debit notes and credit notes are accounting documents used by businesses, with different purposes and recipients.
They are not the same as invoices; these documents are used to let customers or buyers of goods know how much money they owe to the supplier, or how much credit they still have, and to let sellers know how much they are owed by customers.
They are essential documents that help in tracking outstanding payments and shipping.
A debit note and credit note are usually issued at the time of goods being returned by customers to sellers or suppliers of the said goods.
The seller of the products gets a debit note while the buyer of those products gets a credit note.
The vendor or seller also gets the goods back, along with the debit note which states that their account is debited with the amount.
The seller then issues a credit note to the customer stating that their account is credited with the amount (of the value of the goods returned) mentioned.
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However, it is not only at the time of the return of goods by a customer to the seller that debit and credit notes get issued.
Sometimes sellers may inadvertently overcharge customers or make a mistake in calculation.
Or it could also happen that the seller may inadvertently forget to calculate the discount promised during negotiations.
At such times too, the buyer issues a debit note to the seller of the products, informing them that their account will be debited with the amount mentioned in the note.
This amount will be the difference between the amount billed by the seller and the actual amount.
In other words, by whatever amount the customer was overcharged.
The seller then issues a credit note to the customer or buyer, informing them that their account is credited with that amount.
Some businesses follow the practice of issuing debit notes to customers when they sell them goods, to inform them the amount owed to them.
This is normally done before an invoice is sent.
Similarly, a business may issue a credit note to their supplier, informing them that their account is being credited with a specific amount.
However, it must be noted that this last reason is not practiced much today, and so for the purpose of the article, we will focus on the first two.
Before we start to examine the difference between credit note and debit note, let us first look at each of them in detail.
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A debit note is a commercial instrument that is created and issued to the seller by the buyer.
This document contains details like a short description of the goods in question, the amount to be debited to the seller’s account, and the reason for debiting the amount.
It informs the seller that a debit is being made in the buyer’s book to their account.
The motives for doing so could be any of the following:
The debit note decreases the accounts receivables for that particular customer or buyer in the seller’s books.
To acknowledge the receipt of the debit note, the seller generates and delivers a credit note to the customer.
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A debit note format is as follows:
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A credit note is a commercial instrument that is created and issued to the purchaser of goods by the seller.
This document contains details like a brief description of goods, the amount being credited to the customer’s account in the seller’s book, and the reason for the credit.
It is usually issued when the seller receives a debit note from the buyer.
In some cases, the seller may be the first to issue the credit note.
These are the causes for which a credit note is issued:
The credit note decreases the account payables for that specific vendor or supplier in the purchaser’s books of accounts.
Usually, it displays a negative amount.
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A credit note format is as follows:
The journal entry passed when a debit note is issued:
Sales Return Account – Dr
To Debtor’s Account – Cr.
The journal entry passed when a credit note is issued:
Creditors’ Account – Dr.
To Goods Returned Account – Cr.
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A debit note is issued to the seller of goods by the purchaser while returning goods purchased while a credit note is issued to the purchaser of goods or the customer by the seller of goods.
A debit note reflects a positive amount while a credit note reflects a negative amount.
A debit note is issued when the customer or buyer of the goods returns them to the vendor or supplier of those goods.
But a credit note is issued when the vendor or supplier of the goods gets products back from the customer to whom they were sold.
A debit note reduces the account receivables, and a credit note reduces the account payables.
When a debit note is received by the seller, they update their sales returns books and the buyer updates their goods return book; when a credit note is received by the buyer, they update their purchase returns books and the seller updates their sales returns the book.
A debit note is a different form of the return of products purchased, while a credit note is a different form of the return of products sold.
Debit notes are only issued when credit purchases are made, and credit notes are only issued when credit sales are made.
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These commercial instruments offer several benefits to businesses, like:
Credit notes help businesses keep a record of errors in calculation or omission in all the operational business processes.
This will help in rectifying mistakes that have already occurred and take precautions to not repeat them.
When a business issues credit notes, they work as a guarantee to customers while carrying out transactions or entering into contracts.
While it’s true that it creates a temporary minor financial loss, being transparent and honest about your mistakes will go a long way in building trust and forging strong bonds with customers.
And this is crucial if you want your business to flourish and thrive in the long run.
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When you evaluate your mistakes, you can take the necessary steps to enhance operational efficiency.
As credit notes help you record and track accounting errors, they help you to assess and improve operational performance.
Conflicts in business can occur quite frequently if there are no proper methods of detecting invoicing errors and reconciliation.
When credit notes are issued, the possibility of misunderstandings comes down significantly – in fact, there won’t be any scope for misunderstanding as you admit to your customer that an error has occurred.
Issuing credit notes is an indication of your business being orderly and organized, and in accordance with accounting systems.
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Of course, the conventional way was to do it manually, on paper.
With the advent of computers, people started typing them out on document editing software or spreadsheets, or even saving templates.
But none of these methods are free from errors.
Today we have accounting software that is capable of generating and issuing debit and credit notes.
You simply have to enter the details of goods and to whom you are issuing the instrument, and the software will calculate the correct amount, even accounting for tax.
This helps you maintain compliance with accounting regulations, as well as be on good terms with your customer.
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Tranquil cloud ERP is a robust, comprehensive, and flexible ERP solution with a feature-rich Finance Module. It helps you streamline all your financial and accounting operations, and be accurate in all transactions with vendors and customers, as well as to maintain compliance with accounting laws. If you’re unsure how Tranquil can help your business, do book a free demo with us at a time of your convenience, and we will be happy to walk you through our software. Our executives will be happy to answer any queries you may have.