All profit-making businesses involve purchase and sales transactions. This can be purchase and sale of goods or/and services. These transactions happen on the basis of invoices that specify several details including customer name, tax registration numbers, specifications of goods and services supplied, price at which supplied, discount terms, payment terms etc. However, occasions may arise when supplied goods or services may be returned by the purchaser back to the seller. These returns must also be accompanied by specific documents specifying similar details.
Definitions and explanations
A debit note is a document issued by a buyer/customer to a seller/supplier specifying the details of goods returned by him.This is essentially documentary evidence of a purchase returns transaction. When goods are returned by a buyer, he would be entitled to receive the related monetary amount back from the seller, hence he would be debiting the account of the seller in his books. This is the reason for the name – debit note.
A debit note contains several details, broadly including:
- Debit note number
- Name and address of buyer (issuer)
- Name of seller (recipient)
- Description of goods returned
- Reason for goods returned – damage, wrong goods, excess goods received etc.
- Quantity of goods returned
- Rate and price of goods returned
A debit note must accompany goods returned by the buyer. In case of damaged goods, where there may be no physical return of goods, debit note serves as an intimation of the same.Once a debit note is issued by a buyer, he will record an entry for purchase returns in his books of accounts.
A credit note is a document issued by a seller/supplier to a buyer/customer indicating that he has received goods or received intimation of goods returned by the buyer. This is essentially documentary evidence of a sales returns transaction. When goods are received back by a seller, he would be liable to repay the related monetary amount back to the buyer, hence he would be crediting the account of the buyer in his books. This is the reason for the name – ‘credit’ note.
A credit note for sales returns can be issued for several reasons such as receipt of returned damaged goods, receipt of returned incorrect goods, receipt of returned excess goods, over-invoicing etc.
A credit note mentions similar details that are mentioned in a debit note, except that a credit note is issued by a seller to a buyer.
Once returned goods are received by a seller, he will issue a credit note to the buyer and record sales return in his books of account.
Difference between debit note and credit note:
The difference between debit note and credit note has been detailed below:
- Debit note is an accounting document issued by a buyer to a seller stating that the seller’s account has been debited in the books of the buyer, for a purchase returns transaction.
- Credit note is an accounting document issued by a seller to a buyer stating that the buyer’s account has been credited in the books of the seller, for a sales returns transaction.
2. Prepared and issued by
- Debit note is prepared and issued by a buyer or customer who intends to return goods purchased by him.
- Credit note is prepared and issued by a seller or supplier who has received returned goods from his customer.
3. Timing of preparation
- Debit note is prepared before damaged, incorrect or excess goods are returned by the buyer. Debit note may also be prepared in case of over-invoicing.
- Credit note is prepared after returned goods are received by the seller.
4. Received by
- Debit note is received by a seller or supplier of goods.
- Credit note is received by a buyer or customer.
5. Accounting treatment
- Issue of debit note results in recording of purchase returns transaction in the books of accounts of the buyer:
Seller a/c [Dr]
Purchase returns a/c [Cr]
(Being – purchase returns recorded on issue of debit note to seller)
- Issue of credit note results in recording of sales returns transaction in the books of accounts of the seller:
Sales returns a/c [Dr]
Buyer a/c [Cr]
(Being – sales returns recorded on issue of credit note to buyer)
6. Impact on finances
- Issue of debit note, results in increase of receivables for the buyer.
- Issue of credit note, results in increase of payables for the seller.
7. Followed by
- Preparation and issue of debit note is generally followed by physical return of damaged, excess or incorrect goods.
- Preparation and issue of credit note is generally followed by repayment (or adjustment of dues) by the seller to the buyer for goods returned.
Conclusion – debit note vs credit note
Accounting function requires documentary evidence. Documentary evidence serves as the basis of accounting on which accounting entries are made in the books of accounts. This documentary evidence subsequently serves as audit evidence and is essential to carry out the audit function of business accounts. Debit notes and credit notes are one of the important documentary evidences that support recording of purchases and sales. These are typically generated by accounting software and ERPs. They may be e-delivered or physically delivered depending on the type of business arrangement between the transacting parties.