Understanding Debit Note and Credit Note
It is great news to share with your friends and community when you start a business. You may struggle hard to overcome many initial glitches and find your first success and it feels great to deliver your service or product to your client. But, it does not stop there! Once a product or a service is delivered, you need to bill your client. For the first few times or for the few clients the billing process can be easy. However, once you are in the business and are growing, you need to have a proper accounting system in place. Furthermore, you should make it a practice from the beginning to manage a proper system and make note of your transactions. One such method is using the debit note and credit note system.
Now, you will certainly think that invoicing is the only step of the process. Understand that an invoice is just the first document you exchange with your customer in which you mention the charges of your product or service. What if the product you sold or the service you offered is in excess than what the customer required or what if there is some defect in the product or service offered? In this case, you need to have a few more sets of documents. They are called a debit note and credit note respectively.
Know what they are, their format, and how to use them.
What is a Debit Note?
The client or the buyer or the customer issues a note to the seller, service provider, or the supplier requesting to refund or adjust the payment made in the event of faulty goods sold.
In general, the debit meaning is the account entry resulted in an increase or decrease in assets or liabilities respectively on a company’s balance sheet.
The ideal time to present a debit note (GST Compliance)
- Tax invoice is prepared and issued and the taxable amount is less than the actual tax
- Tax invoice is sent and tax charged is less when compared to the tax paid
What is a Credit Note?
On the other hand, a credit note is issued by the seller to the buyer in the event of failing to deliver the product or service. The supplier voluntarily comes forward to refund the invoice in part or whole. The invoice cannot be deleted and thus a credit note must be issued for adjusting the payment.
Meaning and Examples:
Let us take a look at two use cases of issuing a Debit Note and Credit Note:
|Situation:||The amount payable by
the customer to seller decreases ↓
|The amount payable by
the customer to seller increases ↑
|Reason:||Bad quality goods or less quantity
than mentioned is received, etc.
|Extra goods are delivered or low amount
has been charged earlier, etc.
|Result:||Value (price) of good decreases ↓||Value of invoice (bill) increases ↑|
|Next Step?||Customer Issues Debit Note||Seller Issues Debit Note|
|Solution:||↓ Less amount to be paid by
the customer to settle the liability
|↑ More amount to be paid by
the customer to settle the liability
|Final Step?||Seller Issues Credit Note in
response to customer’s Debit Note
|Customer Issues Credit Note in
response to seller’s Debit Note
Why Issue a Credit Note? (GST Compliance)
- When the client returned goods in part or whole
- Offered service is delayed or not meeting the client’s expectation
- Client accepts only partial product and rejects the remaining but the invoice is made for the whole product
- Seller included more tax rate than the actual tax
- Invoice prepared by the vendor is more than the actual goods offered to the buyer
Debit Vs Credit Note
|Debit note||Credit note|
|A customer prepares and sends to the seller||A seller sends a note to the buyer|
|It is a note that states the debit made from the supplier account||This note will confirm that credit is made in the client’s account|
|Purchase return book is updated||Sales return book is updated|
|Account Receivable (AR) is minimized||Accounts Payables (AP) is minimized|
|It is a credit to the customer and is written in blue ink||It is a debit to the seller and is noted in red ink|
|Debit note is exchanged for a credit note||The credit note is exchanged for a debit note|
|Is issued when payment is already made||Is issued when an invoice is already raised|
Debit and Credit Note Format
Both the formats can be made in MS Excel, MS Word, or PDF. However, with the advancement in technology, you can have it handy in your smartphones too. Irrespective of where you have it, the format remains the same which must contain the following details. There needs to be only minor tweaking between a debit note and a credit note.
GST guidelines should be followed while making a credit or a debit note.
- Heading – Mention Debit Note or Credit Note
- Create a serial number for each financial year and provide a unique one for every note sent following the suggestion given below.
- Let it not be more than 16 characters
- Let it contain alphanumeric characters with special characters like dash, slash, a hyphen, etc.
- Mention the date when the note is issued
- Add invoice number and invoice date for reference
- Include the sender’s name, contact details, and GSTIN (Goods and Service Tax Identification Number)
- Add recipient’s contact details, and GSTIN (Goods and Service Tax Identification Number)
- Similarly, add recipient’s delivery address, name, and contact number
- Date and serial number that corresponds to the bill or the tax invoice must be added
- After that, add the value of the service or the product offered (taxable amount) including the tax debited details
- End it with a digital signature of the supplier/buyer
Note: Supplementary invoice is the other name referred to the debit note and credit note.
Points to Remember when Preparing a Debit or a Credit Note:
- All amount entered in a credit note must be negative likewise in a debit note it must be positive.
- Maintain the debit or credit note for 6 years from the due date of furnishing the yearly tax return.
- It is important to present a debit or a credit note as per GST law and the registered party must issue this document.
- Issue credit note earlier to the date of filing yearly returns or 30th Sept of every financial year. However, there is no time restriction to issue a debit note. It is because the debit note is beneficial to the government for tax collection, on the other hand, credit note reduces the tax liability. Therefore, remember to stick to timelines when you issue a credit note.