Businesses involve millions of transactions and they are also quintessential of business operations routinely. The process of business transactions does not end with the buying and selling of goods, it also encompasses purchase return and sales return from the buyer or customer. For the supplier, it is essential to raise a tax invoice for the supply of goods or services. In doing so, there is a possibility of making errors while issuing invoices or any other kinds of mistakes. To overcome such situations, the supplier or buyer issues a credit note or debit note, as per the requirements. Both are an integral part of customary business transactions.
A debit note is a commercial instrument prepared and issued by the buyer and sent to the intended supplier providing information regarding the amount debited from the supplier’s account and the reasons for the same. It is also supplementary to the original invoice. Circumstances in which debit note is issued:
- Taxable amount present in the invoice is less than the actual taxable value.
- Tax charged in the invoice is less than the actual tax to be paid.
A credit note or credit memorandum is a legal document issued by the supplier to the intended customer or buyer of goods for sales return. It is sent to inform about the credit that has been made in the account of the customer or buyer along with the reasons for the same. A credit note can be issued in the following situations:
- Taxable amount present in the invoice is more than the actual taxable value.
- Tax charged in the invoice is more than the actual tax to be paid.
- Recipient returns the goods to the seller (Sales return)
- Goods are found to be defective, faulty or not like the requirements of the customer or buyer.
Format of the Note
As such, there is no prescribed format for the preparation of the note. However, there are certain relevant details that need to be covered in the credit or debit note. The mandatory particulars are being followed:
- Supplier’s name, address and the GSTIN
- Type of the required document
- A consecutive serial number that contains alphabets/numeric/special characters, which is unique for a financial year
- Document’s issue date
- Intended recipient’s name, address and the GSTIN/unique identification number, if registered
- If the recipient is unregistered, therefore, recipient’s name and address and the address of the delivery, along with the state name and its code
- Tax invoice’s date and serial number, as the situation may be, bill of supply
- Valuation of taxable supply of goods or services, tax rate and the value of tax credited or, as the situation may be, debited to the recipient
- Supplier’s signature (can be digital) of the supplier or any intended authorized representative
|Basis of Comparison||Debit Note||Credit Note|
|Meaning||It is a commercial legal document issued by the buyer or customer to the intended seller reflecting that the account of the seller is debited later due to purchase return, any sort of discrepancies, trade discount, etc.||Also known as a credit memorandum, it is a commercial instrument issued by the supplier or seller to the intended buyer to notify that credit has been made into the buyer’s account.|
|Prepared and Issued By||It is prepared and issued by the customer or buyer of the goods.||Issued by the seller or supplier or sales team who sold the goods.|
|Received By||It is received by the seller or supplier of the goods.||It is received by the customer or buyer of the goods.|
|Colour of Ink Used||Uses blue ink for giving out the requisite information.||Uses red ink.|
|Possible Effects||Reduction in account receivables (AR)||Reduction in accounts payables (AP)|
|Accounting Treatment||After issuance of a debit note, the supplier accounts are debited and purchase return accounts credited in buyer’s accounts.||Once the credit memorandum is issued, the buyer account is credited in the seller’s account and sales return accounts are debited.|
|Exchanged For||Credit Note||Debit Note|
|Implies||Purchase return of goods||Sales return of goods|
|Timing of Preparation||Debit note is prepared before defective, damaged or extra goods returned by the buyer. It may be also used in case of over-invoicing.||Credit note is prepared after returned goods and duly received by the seller.|
|Represents||Positive amount||Negative amount|
|Books Updated||PurcaPurchasern book||Sales return book|
Buying and selling is the core of the business and primarily based on documentary evidence. It serves as the foundation of the accounting process and helps to maintain the books of accounts supporting legal documents. Therefore, the issuance of credit or debit notes provides a convenient method that assists the supplier in the avoiding lethargic process to rectify the mistakes in the original taxable invoice.