What are Debit and Credit Notes: Meaning, Differences & Examples

You commonly come across a debit memo or a debit note in business-to-business transactions. These are transaction-based notes generated for the purpose of documentation. However, no real money is exchanged with a credit note. It is rather used to counteract a previous invoice of a payment already made.

Keep reading to learn about debit and credit notes in detail.

Sellers use debit memos or notes as a document to help the purchasers keep a record of current debt obligations. Alternate use of these memos involves a purchaser producing the document while returning products purchased via a loan. A debit memo includes information about an immediate payment or may serve as a reminder of current due funds.

Debit memos, as per GST, are documents issued by a supplier of goods or services to a recipient based on the following pointers:

• When a tax invoice is generated for a certain supply of goods or services or both of these.
• Change in taxable value or tax charged in invoice goes beyond taxable value or tax payable with respect to a certain supply.

The records of debit memos or supplementary invoices need to be retained until the expiry of 72 months from the due date of an endowment of the annual return for the year pertaining to the given records and accounts.

Here is a list of the details or format of a debit memo or note:

• Name and address of the issuer
• Number of debit memos or note
• Invoice Date and Due date
• Name and address of the recipient of the debit memo issued to
• Goods details like item name and number, unit price, quantity, and the total price
• Grand total
• Tax if any
• Bank details

Common reasons for issuing debit memos or notes are as follows:

• A purchaser receives a number of goods or services more than what the tax invoice has records of.
• Sellers issue these notes to make purchasers recollect their current debt obligations.

An example of a debit memo or note:

Let us assume a company named ABC purchases 10,000 widgets from a company XYZ at a price of 80 rupees per widget. Company XYZ delivers the order of 10,000 widgets and issues an invoice for 8,00,000 rupees to company ABC. However, after inspection company ABC determined that 580 of the widgets are unstable and damaged.

Company ABC will now generate a debit memo or note, sending it to company XYZ entailing the return of 580 damaged widgets asserting that company XYZ needs to debit the due amount accordingly from company ABC by 46,400 rupees.

A seller generates and extends a credit memo or a credit note to a purchaser stating that the latter's account receives credit from the former, marked in his books. Furthermore, a seller noticing a reduction of the taxable value of supplied products after issuing a tax invoice generates a credit memo prescribing particulars of the instance.

Credit memos, as per GST, are documents issued by a supplier of goods or services to a recipient based on the following pointers when:

• Deficient goods or services are received on a purchaser's part.
• Goods supplied are sent back to a seller under the circumstances.

Credit memo records or a supplementary invoice need to be retained until the expiry of 72 months from the due date of presentation of the annual return for the year pertaining to the given records and accounts.

Listed below are details or format of a credit memo or note:

• Name and address of issuing company
• Credit note number
• Credit note date and due date
• Name and address of the entity to whom the credit memo is issued
• Details of goods like item name, the quantity of each, product code, per unit price, and total price
• Grand total
• Tax if any
• Bank particulars

Some of the common reasons for issuing credit memos or notes are as follows:

• It is issued when an error is registered in a pre-issued invoice
• These notes can be utilised in instances that require an invoice to be re-issued or changed.

An example of a credit memo or note:

Product A is priced at 1000 rupees and is incorrectly invoiced at 1500 rupees. Then, the vendor issues a credit memo or not of 500 rupees.

It is all about the debit and credit notes. A debit note helps determine net purchase (total purchase-return outward). Conversely, a credit note helps determine net sales (total sales-return inward).