Debit note and credit note are frequently used documents in any business and is of paramount importance for adjustments in the balances of debtors and creditors. In this article, I am going to discuss the meaning and uses of debit note and credit note.
Note: If you don’t feel like reading the whole post and want to watch a quick tutorial about Debit and Credit Note in Hindi then scroll to the bottom of the post for the video tutorial. If not you can continue reading the post.
Let’s start with debit note first.
When goods are returned, the purchaser returning the goods prepares a memo with full particulars of the return and sends it to the supplier to whom the goods are returned. This memo is called the Debit Note.
A Debit Note is also used by a Purchaser when he has been wrongly overcharged or when he claims an allowance for damaged goods from the supplier.
Now let me ask you a question:
Can you tell me why we call this document a Debit Note?
Not Sure? The logic is pretty basic. Let me explain.
Consider a situation where Mr. P buys something from Mr. S worth Rs 1000/-. Mr. P will record the purchase in his books of accounts as follows:
Purchase Account Dr Rs 1000
To Mr. S Account Rs 1000
So you can notice that when a purchase is made, the account of the supplier is credited in the books of the purchaser.
In the above journal entry, the account of Mr. S (Seller) has been credited in the books of Mr. P (Purchaser)
Now assume that goods worth Rs 400 out of the above were returned to Mr. S by Mr. P.
The journal entry for the return in the books of Mr P would be:
Mr. S Account Dr Rs 400
To Purchase Return A/c Rs 400
Thus, in the event of return of goods, the liability of Mr P to pay Mr. S Rs 1000 is reduced by Rs 400. Now to reflect this reduction in liability, Mr P has to reduce the credit balance in the account of Mr S in his books by debiting his account by Rs 400.
Other Scenarios Where The Debit Note Can Be Used
Apart from return of goods, a purchaser needs to reduce his liability towards his supplier when
- he has been overcharged by the supplier; or
- he wants a settlement for damaged goods sent by the supplier
So in the above cases he debits the account of the seller in his books to reduce his liability.
The information of such debit in the books of the purchaser must be communicated to the seller via proper document with full details of the reasons and the amount being debited. This document is called the debit note.
Thus, a debit note may be defined as a document sent by a customer (or debtor) to his supplier (or creditor), showing that the supplier’s or creditor’s account has been debited by the amount shown.
I hope now you are aware of the concept of a Debit Note. So lets proceed with Credit note.
When goods sold are returned to a seller by his customer for some reason or the other, the memo issued by the seller to the customer acknowledging the receipt of the goods is called a Credit Note.
From the above illustration you can have an idea of the whole process of the Debit Note and Credit Note cycle that takes place on the event of return of goods.
However, as discussed above in Debit Note, a Credit Note can also be issued by the seller when
- a customer a has been overcharged; or
- is given an allowance for damaged goods
Why is the Credit Note called a Credit Note?
Let us take the same example from above i.e Mr. P buys something from Mr. S worth Rs 1000/-. Now we will consider the situation from the point of view of the seller.
The entry for the sale in the books of Mr S (seller) would be:
Mr P Account Dr Rs 1000
To Sales Account Rs 1000
From the above entry you can see that the account of the purchaser i.e Mr P is debited in the case of sale of goods as Mr. P now becomes the debtor of Mr. S. Now suppose Mr P returns goods worth Rs 400 to Mr S and sends a Debit Note with the returned goods.
The entry for the return in the books of Mr S (seller) would be:
Sales Return Account Dr Rs 400
To Mr P Account Rs 400
As soon as Mr S accepts the debit note sent by Mr P on return of the goods, he needs to reduce the debit balance of Mr P in his books as the amount of money receivable from Mr P is reduced by Rs 400. Thus he credits the account of Mr P in his books to adjust the debit balance in Mr P Account to make it equal to the amount receivable from him.
The information of such credit in the books of the seller is communicated to the buyer along with the acceptance of return of the goods with the help of a proper document. This document is called the Credit Note.
Credit note is nothing but an acceptance of the Debit note
From the above format of the Credit Note, you will notice that it is nothing but a mirror image of a Debit Note.
Thus, a Credit Note may be defined as a document sent by the seller to a customer showing that the customer’s account has been credited with the amount shown.
So that was all about Debit Note and Credit Note. Please keep in mind that Debit Notes and Credit Notes can be used in any situation where the buyer and seller need to adjust their balances in each other’s books for a valid reason mutually agreed by the two.
Video Tutorial in Hindi
Below is a video on the same topic where the concept is explained in detail in Hindi. If you are conversant with the Hindi language then please consider watching it for a deeper understanding
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