written by Sourish | May 30, 2021

What are Debit, Credit Note and their Formats?

You might be well aware of the term invoice or bill or bill of materials. An invoice is used to maintain a record of sales. So, what happens when there is a change in the value of those invoices. Will you go about editing those invoices? It does not make sense to do so. You have already generated the invoice and recorded those transactions in the journal. 

The only way out is to make additional entries that indicate a change in the original invoice value and provide a document for further proof of the actual value of the sale made. These documents are called credit and debit notes

In the sections that follow, we shall understand what debit note and credit is. We would also learn what should be mentioned within the debit note and credit note and what should be the format of a debit or credit note? Glance through a few examples of debit notes and credit notes.

Debit Note And Credit Note Explained

What is a debit note?

A debit note is also known as a debit memo. It is a document that is issued from a buyer to a seller indicating a request to return funds as a result of incorrect or damaged goods or services or cancellation of purchase. A debit note is issued before a credit note can be issued by the supplier and acts as a buyer’s formal request to issue a credit note. 

A debit note can be issued by a buyer to the seller requesting the return of the partial or whole amount of payment already made. It could be due to incorrect or damaged goods received or cancellation of the order, or other special circumstances. A debit note serves as evidence of a purchase return in the buyer’s accounting books. On the other hand, a credit note is proof of a sales return. 

It is issued when, as a customer, you receive goods or services that may not be of expected standard while you are in receipt of the final invoice from the seller. As a buyer of goods from a supplier, if you would like to return the purchased goods for any valid reason, you can issue a debit note.

Some common reasons for issuing debit notes:

  • Damaged or defective goods received.
  • The purchaser has overbilled the invoice.
  • Incorrect invoice amount

Let’s look at a debit note example.

Company A is the purchaser, and Company B is the seller or supplier. The sequence of events below will lead to the issuance of a debit note.

  1. Company A makes a purchase of goods worth Rs. 1000 from Company B
  2. Company A receives the goods, along with the final invoice, but finds some goods to be damaged.
  3. Company A communicates to company B about the damaged goods and its intention of returning the goods as is.
  4. Company A raises a debit note against company B, containing information about the original purchase and the value of the damaged goods.
  5. On receipt of the debit note, Company B, after some due diligence, issues an appropriate credit note.

Let’s look at another example where a credit note is raised by a supplier against a buyer.

Continuing with our companies, the following list of events results in a credit note being raised by the supplier or seller against a purchaser.

  1. Company B fulfils company A’s order by shipping goods worth Rs.10000, along with the invoice.
  2. Company B realizes there is a mistake in the value of the invoice amount and that the actual value is lesser than the invoiced amount.
  3. Company B raises a credit note against company A for the difference in amount.

Let’s take a look at the definition of debit note from a GST view.

As per section 34(3) of the Goods and Services Tax Act, “Where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient a debit note containing such particulars as may be prescribed”.

As per GST, there are only 2 scenarios where a seller or supplier can raise a debit note-

  • When the original tax invoice shows the taxable value lesser than the actual taxable value.
  • When the original tax invoice shows less tax charged than the actual tax to be paid.

Also Read: Income tax Calculator

What is a credit note?

A credit note is also known as a credit memo. It is a document that is issued by the seller to indicate a full or partial return of funds. It may arise in the event of an incorrect or damaged supply of goods, cancellation of a purchase or an invoice error.  It is usually raised in response to a debit note from a customer. This document can also be used by the customer or purchaser against a future order.

As long as the total invoice amount is not exceeded, you may issue multiple credit notes.

Some common reasons for the issuing credit notes:

  • If you are the supplier and have supplied goods of unsatisfactory quality to the buyer and the buyer wants to return the same, you can issue a credit note for adjustments against the invoice already raised.
  • Corrections in already issued invoices.
  • Correction of discount rates.
  • Cancelling any pending payments against invoices.

There are 2 types of credit notes, based on where it is applicable.

  • Credit notes issued on outgoing payments.
  • Credit notes issued on incoming payments.

Let’s take an example of a credit note.

Company A is the purchaser, and Company B is the supplier. Company A places Rs.10000 worth of order from Company B. After sampling the delivered goods, company A informs company B about the low quality of goods detected in the sample. Company B verifies the sampled items to confirm the defects and issues a credit note against the original invoice for the amount mutually decided on.

In such cases, the original invoice can be cancelled against the credit note issued, and a corrected invoice can be raised. This credit note may be used by Company A for further purchases from company B in the future. A refund of the amount may also be agreed on.

Definition of a credit note as per Sec 34 Goods and Service Tax.

As per the GST act, a credit note is defined as below.

Where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient a credit note containing such particulars as may be prescribed.

Details to be included in a debit note and credit note.

Debit note and credit note are issued when certain goods are returned to the seller by the customer. Through a debit note, the customer lets the seller know that s/he is returning certain goods bought by them. The credit note, on the other hand, lets the customer know that the money for which the debit note was sent, is being returned.

There are some prescribed details to be mentioned on a credit or debit note; they are:

  1. GSTIN, name and address of the supplier.
  2. An alphanumeric document serial number unique for the financial year.
  3. Date of issue.
  4. GSTIN (if registered), name and address of the recipient. In case the recipient is not registered, the name and complete address of the delivery may be used.
  5. The invoice number that the debit or credit note is being issued against.
  6. The taxable value of the goods/services, the applicable rate of tax, amount of tax credited or debited to the recipient.
  7. A stamp/seal and signature of the supplier.

Additional notes

  • There is no time limit for issuing a credit or debit note as long as it is issued in the relevant year. 
  • All debit and credit notes have to be declared in GST returns filing the following month except in the month of September, following the end of the year when supply was made and the month of filing annual returns.
  • Debit notes do not impact tax collection, but credit notes will impact tax collection negatively.
  • A debit or credit note issued by a recipient to a supplier will not be considered a legal document as per GST law.

Also Read: Net Present Value Explained

FAQs

What is a credit note under GST?

A credit note is an authorised document that indicates a correction in the original invoice amount indicating the amount that the supplier owes. This note can be used to either deduct the amount from an invoice issued later or to get an outright refund.

What is the format to be followed on a debit or credit note?

A debit or a credit note should contain the below mentioned details-

  1. A heading indicating whether it is a debit or credit note.
  2. A unique number given to the credit or debit note for the given financial year.
  3. Date of issue of the note.
  4. Original invoice number and date.
  5. Issuers name, contact details and GSTIN.
  6. Recipients name, contact details and GSTIN.
  7. Recipients delivery name, contact details.

What are the scenarios when a credit note is to be issued by the supplier?

When the original tax invoice is already issued and taxable value exceeds actual taxable value

The recipient is not happy with the goods or services and requests to return a partial amount, returning goods if any to the supplier.

In what scenarios does a supplier have to issue a debit note?

After having issued a tax invoice, it is found that the taxable value mentioned is less than the actual taxable value.

After having issued a tax invoice, it is found that the tax amount charged in the invoice is less than the actual tax payable.

What is a supplementary invoice?

A supplementary invoice is issued by a taxable entity wherever a deficiency is found in an already-raised tax invoice. 

What is a revised invoice?

In GST, all invoices issued between the date of implementation of GST and the date of issuance of GST registration certificate will have to be reissued in the form of a revised invoice and have to be raised within a month of issuance of the registration certificate.

What is a debit note under GST?

A debit note is a document from the customer to the seller or supplier demanding to adjust or refund any payment that has been made due to faulty goods or service.

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