Purchase and sale transactions are day-to-day operations between the buyer and the seller. Similarly, returning goods is also a normal business activity. If the numbers of such transactions are large enough, then businesses rely on debit and credit notes to keep track of the purchase and sales returns. Debit and credit notes are generally issued when the buyer returns products or there is a change in the invoice due to some issues. Usually, the buyer issues a debit note while returning the goods to the seller. On the other hand, the seller usually issues a credit note to acknowledge that they have received the returned goods from the buyer. To better understand the two terms, we need to check the differences between debit notes vs credit notes.
Debit Note vs Credit Note – When are They Issued?
Following are the reasons for the issue of debit and credit notes:
Decline in Amount Payable
Due to the return of the inferior quality of the goods, the value of the goods may change even after the seller generate the invoice. Thus, the buyer issues a debit note detailing the reason for the return of goods and the amount of goods returned to the seller. In simple terms, a debit note is not positive for the seller as to their overall amount decreases. Buyers will now pay less due to the return of goods.
When Buyer has to Pay More
The second scenario when there is a need to issue debit and credit note is when the buyer has to pay more than the earlier amount. It could be when the seller has undercharged the buyer or there is an increase in the taxes. In such a case, the seller issues the debit note to the buyer. On the other hand, the buyer issues the credit note to the seller to acknowledge the receipt of the debit note.
Debit and Credit Note – Differences
Following are the differences between debit notes vs credit notes:
A debit note is a document suggesting that the buyer is liable to pay less as he or he is returning some goods. This could be due to various reasons such as faulty goods/ Credit note. On the other hand, is the acknowledgment that the other party has got the debit note.
Usually, the buyer issues a debit note, and the seller issues the credit note. However, there are a few scenarios under which a buyer issues a credit note. For instance, a seller can issue a debit if the buyer has been undercharged.
On the other hand, a credit note usually comes from the sales team or seller acknowledging that there has been a discrepancy in the invoice.
Reason for Issue
Buyer issues a debit note if they are overcharged or if they have got defective products. However, a credit note is issued by the seller in exchange for the debit note. The credit note suggests that the seller would credit the buyer’s account with the amount mentioned in the debit note.
It might sound strange, but debit notes are always in blue ink. However, credit notes are in red ink. The simple reason behind this is the amount in the debit note is positive, but the credit note is in red ink because it shows the negative amount.
A debit note lowers the receivables of the seller. But, credit note lowers the payables of the buyer. Entry for the debit note is made in the purchase returns the book, whereas, in the case of the credit note, the entry is made in the sales returns book.
When a buyer sends the debit note, in buyer’s accounts, the account of the supplier is debited, whereas the purchase return is credited. On the other hand, in the books of the seller, the sales return account is debited. And the customer or the buyer account is credited as they are entitled to a higher payment.
You should now know that credit notes and debit are two aspects of the same transaction. Meaning, a buyer usually issues a debit note, and in exchange, the seller issues a credit note.
Also, read – Accounts Receivable vs. Accounts Payable.