In financial transactions, businesses often use various documents to record their business dealings. However, one such crucial document that plays an essential role in business is a debit note.
In this comprehensive guide, we will explore debit notes in detail. So, let’s get started.
Debit Note Meaning
It is also known as a debit memo, a document issued by the product or service seller to its customer to inform all about the current debt obligations. On top of that, it is also generated by the buyer when they have to return the goods they have received on credit. However, it is a very common document in B2B transactions.
Furthermore, they differ from invoices as they are written in letters and dont demand immediate payment. In simple words, these notes act as a reminder for the consumer of all the potential debt commitments.
Components of Debit Note in Accounting
As per the law, there is no fixed format for debit notes, but there are some compulsory fields to be present in debit note format. They are: –
- The description that says this document is a debit note
- Full name, address, contact details, and GSTIN of the recipient
- Details of the supplier like GSTIN number, name, address, contact details, and serial number of debit note
- Invoice reference number
- Product information that is issued
- Class of items debited
- Cost of product or services taken
- Total amount of products
- Date of issue of debit note
- Authorized signature
How Does a Debit Note Work?
A debit note is issued for business-to-business transactions. However, debit note transactions also involve an extension of credit. That means when any of the vendors send a delivery of goods to the business before the payment is made.
However, these notes tell the buyer that the vendor has debited their account. In this case, real goods can change hands until the real money is transferred after that invoice is issued.
Features of Debit Notes
Some of the most significant features of debit notes are: –
1. They are issued on credit purchases
When any products or services are purchased on credit terms, a debit memo accompanies the purchase.
2. It needs acceptance
This document will only become valid if the seller of the goods or services accepts the debit notes and makes mandatory changes in the accounts books.
3. The seller or the buyer issues it.
The buyer of the product or service sends this document to the seller that indicates all the purchase details. On the other hand, vendors can issue this document if the invoice contains some mistakes.
4. Helps in reducing buyer’s debt obligations
If you talk about the buyer’s perspective, the debit note is a positive amount that curtails their liabilities towards the seller.
5. It states the reason.
If the buyer wants to return the goods, they mention why they are returning products.
Debit Note Format
[Your Company’s Name and Address]
[City, State, ZIP Code]
[Date]
Debit Note No: [Unique Debit Note Number]
[Supplier’s Name and Address]
[City, State, ZIP Code]
Dear [Supplier’s Name],
Subject: Debit Note for [Description of Goods/Services] – Invoice No. [Supplier’s Invoice Number]
We are writing to inform you that certain discrepancies have been found in the goods/services supplied by your company, as mentioned in the above-referenced invoice. We have carefully reviewed the delivered items/services and regret to inform you that they do not meet the agreed-upon standards due to the following reasons:
[Describe the first discrepancy – e.g., Quality Issue]
[Details of the quality issue, such as damaged goods or substandard quality]
[Describe the second discrepancy – e.g., Quantity Issue]
[Details of the quantity issue, such as missing items or incorrect quantity]
[Describe the third discrepancy – e.g., Price Discrepancy]
[Details of the price issue, such as incorrect pricing or overcharged amount]
Debit Note Example
The overall process of debit notes is quite similar to credit notes. That means the business keeps it for accounting purposes. Let’s understand debit notes with the help of an example.
- XYZ company purchases products from the ABC company for Rupees 10,000.
- After the arrival of the products at company XYZ they come to know that products are damaged. In this case, company XYZ has to return those products to company ABC.
- Here, XYZ company will issue a debit note to the ABC company mentioning all the essential information like original purchase date, amount, VAT, etc.
- Now, company ABC gets the debit note, and they will review the note thoroughly and approve this request. After that, they issue a credit note proof of reimbursement to XYZ company.
Supplier Issues Debit Note Example
There are also cases when a debit note is issued by the supplier to its customer. Let’s have a look: –
- A supplier of the company ABC sells and ships certain products to company DEF worth Rupees 20,000.
- But by mistake, company ABC sent the invoices of Rupees 15,000 to DEF company.
- After some time, company ABC learned of this mistake and issued a debit note of the remaining amount to resolve the difference and request the necessary adjustments.
What is the Difference Between a Debit Note and a Credit Note?
| Aspect | Debit Note | Credit Note |
| Definition | It is a document sent by a buyer to a seller indicating that the seller’s account has been debited for a certain amount due to various reasons, such as goods returned, pricing discrepancies, or damaged goods. | It is a document sent by a supplier to a buyer, indicating that the buyer’s account has been credited for a certain amount due to reasons like goods returned, overcharging, or other errors. |
| Purpose | It is used to request a debit in the seller’s accounting books and reduce the amount payable by the buyer. | It acknowledges a reduction in the buyer’s account payable and allows them to pay for the reduced amount. |
| Issuer | Buyer | Seller |
| Nature | Debit entry | Credit entry |
| Effect on Accounts | Increases buyer’s accounts payable and decreases seller’s accounts receivable. | Decreases the buyer’s accounts payable and increases the seller’s accounts receivable. |
| Transaction Type | Rectifies overbilling or errors in the invoice. | Rectifies underbilling or errors in the invoice. |
| Authorization | Issued by the buyer after agreement with the seller. | Issued by the seller after agreement with the buyer. |
| Accounting Entry | Debits accounts payable or expense account. | Credits accounts payable or revenue account. |
Correct Procedures for Issuing and Handling Debit Notes
1. Timely Issuance
Debit note in GST should be issued promptly upon discovering discrepancies. Any delayed communication can lead to misunderstandings and complications.
2. Detailed Information
A debit note should contain detailed information about the discrepancy, including the transaction date, invoice number, description of goods, quantity, price, and the reason for issuing the note.
3. Clear Communication
The language used in a debit note should be clear, polite, and professional. It should clearly state the problem and request the necessary action, whether a refund, replacement, or credit note.
4. Documentation
Proper documentation of the debit note, including copies kept by both the buyer and the seller, is essential. However, this documentation serves as a reference for future interactions and audits.
The Bottom Line
In the business, debit notes are commonly used to exchange products and services. However, it is a document that both vendor and buyer can send to each other if some issue occurs. The debit note shows that the buyer of the products has some payment pending with the supplier. But ensure you don’t confuse yourself with the invoice.
Frequently Asked Questions
1. What is the main purpose of issuing debit notes?
Debit notes are issued for various reasons. They are: –
- A vendor issues a debit note to its customers that shows some or full payment is due for the delivered products or services.
- A customer can also issue a note if the products are damaged and need to be returned.
2. What are debit notes?
It is a document the seller issues to the buyer for the products or services taken. On the contrary, sellers can also issue a debit note to the buyer if they want to rectify the invoice or the damaged products.
3. Are debit notes and invoices the same?
According to experts, a debit note is a written receipt of the purchase of the products or services sent to the buyer before the final payment is made. On the other hand, the invoice is a bill that a seller issues after the completion of the total sales transaction.