Every day, millions of buy and sell transactions occur, and many clients return items when they decide they are unsuitable for their needs.
Debit notes and credit notes are utilised when things are returned between two firms.
When a customer returns an item to a seller, a debit note is given by the customer, and the seller provides a credit note to acknowledge receipt of the returned item.
A debit notice that shows that the appropriate amount has been deducted from the seller's or supplier's account is sent to him when the products are returned.
In contrast, a credit note is given to a consumer who returns products to show that the amount shown on the note has been credited to his account.
Read on to learn about the key distinctions between a debit note and a credit note that we have covered in the provided text.
How Do You Define a Debit Note?
A debit note is a type of business instrument that the buyer creates and gives to the seller.
A brief description of the products in question, the amount to be debited from the seller's account, and the justification for the debit are all included in this document.
It notifies the seller that their account is being debited in the buyer's book.
Any of the following might serve as the justification:
- If there is an excessive charge to the buyer's account, a debit notice is given to the seller.
- The seller issues a debit note when a client or buyer returns goods they acquired from the vendor.
- It is also given out when the client undercharges the seller's account.
The debit note causes the seller's records to show a lower amount of accounts receivable for that specific client or buyer.
The seller creates and gives the buyer a credit note as a way to confirm receipt of the debit note.
Form of a Debit Note
A debit note looks like this:
- The issuer's name and address
- Banknote number
- Date and Due Date of Invoice Issued to Name and Address
- Product information, including item name and number, quantity, unit price, and total cost
- Total amount due, including all applicable taxes and bank information
The meaning of a credit note
A credit note is a document that one party prepares and gives to another party, including information on the money credited to the buyer's account and the justifications behind it.
It's given out in return for the Debit Note. It provides the buyer with the knowledge; the account is then credited to the vendor's books.
Red ink is used to prepare the memo. The following are the justifications for issuing credit notes:
- The seller issues the credit note when the customer overcharges the seller's account.
- A credit note is also provided when the supplier receives the items he supplied to the customer.
- If the buyer believes the vendor has undercharged him, he may also issue a credit note.
Form of Credit Note
The format of a credit note is as follows:
- The issuer's name and address
- Account number
- Date of credit note and due date
- Identity and location of the organisation to whom the credit note is being issued
- Product information, including item name, product code, number of each, per-unit cost, and total cost
- Grand total Tax information, if any
The Importance of Debit Notes Under GST Law
A provider of goods and services issues a debit note under Section 34(3) of the CGST Act 2017 when;
Issuing a tax invoice for the delivery of goods and services
The taxes levied on the invoice are less than the taxable value of the supply made.
As shown on the invoice, the quantity of goods/services given exceeds the initial agreed-upon commitment.
One of the essential functions of a debit note under GST is that it forms part of the information for GSTR-1, the month in which the supply of goods occurred.
The identical information appears on Forms GSTR-2A and GSTR-2B for the receiver. Once the verification is complete, the receiver may accept it and include it in their GSTR-3B.
Previously, when submitting a credit or debit note, the original invoice number had to be given on the GSTN site in Form GSTR-1 and Form GSTR-6.
The alteration dealing with the decoupling of debit notes from their original invoice, on the other hand, resulted in the following:
- The place of supply for a certain debit note or credit note might be specified to define the supply type (intrastate or interstate).
- When a debit or credit note is issued only for the difference in tax rates, the note's value might be reported as zero. Simply entering the tax amount will be enough.
The delinking amendment also had an impact on the treatment of Input Tax Credit (ITC) for debit notes.
Before the modification, the time restriction for claiming ITC was related to the date of the invoice, not the date of the debit note's issuance.
However, as a result of the adjustment, the time restriction for claiming ITC is now calculated based on the date of the debit note.
For example, if an invoice was issued in March 2019 and a debit note was issued in October 2019, the final day for claiming ITC would be the due date of Form GSTR-3B for October 2020 because the debit note was issued in the fiscal year 2019-2020.
Advantages of debit notes
- The necessary information is updated in the debit notebook (this is not one of the account books). The top copy and the returned goods will be given to the supplier, and the duplicate will be maintained in the debit notebook. As a consequence, the trader has a list of all the goods they've returned, together with the people who received them.
- The duplicated debit note still maintained in the debit notebook is compared to the credit note the supplier provides.
- To ensure that all returned products have been accounted for and credit notes have been received, the debit notebook must be inspected periodically
- A messenger may bring the debit notebook if the things are returned to a local source. The sender of the returned goods may sign the book on behalf of the messenger. Other times, the carrier's signature on the consignment letter must be relied upon by the merchant (for instance, the SAR). The signature in both situations demonstrates that the goods were returned.
- The provider retains the original debit note. From this, the supplier's record may be used to generate a credit note.
- The provider retains the original debit note. From this, the supplier's record may be used to generate a credit note.
Reasons for issuing a credit note
According to Section 34(1) of the CGST Act, the supplier may send a credit note when a tax invoice is produced and has to be modified to lower the specified tax amount.
The following are a few typical justifications for which the seller provides a credit note:
- Due to quality difficulties, service rejections, or receiving damaged items, the consumer may return purchases.
- Incorrectly charging the extra consumer fees or having the buyer pay more than the value of the invoice.
- Give the purchaser a post-sale discount.
- The amount that the client has received is less than what is shown on the tax invoice.
- Reversing any outstanding payments on bills.
Reasons for Issuing a Debit Note
For the following reasons, a buyer will issue a debit notice to a seller:
1. The invoice's amount needs to be revised.
- Receiving flawed or damaged products
- Overvaluation of the invoice
- Refusing to purchase an item or service
- When the purchased products fall short of the buyer's expectations
2. For the following circumstances, a seller may issue a debit note to a buyer:
- Increase in the amount due to the seller
- Undervaluation of the invoice
- Order of goods or services is expanded
Issuing a credit note: the procedure
The following example explains the credit note issuance procedure:
- Using a tax invoice, Supplier A sells items to Buyer B.
- Buyer B returned the supplied products along with a debit notice after noticing certain quality concerns.
- Supplier A created a credit note to recognise buyer B after accepting the debit note.
Issuing a debit note: the procedure
The first scenario involves a buyer, Jackson Enterprises, purchasing 10,000 whistles on credit from Obi Ltd. for Rs. 15 each.
The delivery is made by Obi, who also provide Jackson Enterprises with an invoice at the time of delivery. 430 whistles are determined to be broken, and 200 to be faulty after inspection.
Along with the return of the 630 whistles, Jackson Enterprises prepares a debit note to be delivered to Obi Ltd. will need to deduct Rs. 9,450 from the amount owed to Jackson Enterprises as a result of the debit note and the whistles being returned (630 whistles x Rs.15).
In scenario two, Jackson Enterprises buys 10,000 whistles from Obi Ltd. on credit for Rs. 15 each. It is delivered by Obi.
At the time of delivery, Jackson Enterprises receives an invoice from the vendor for the purchase.
The invoice sent to Jackson Enterprises was understated by Rs. 10,000 when Obi Ltd. realised that the pricing per whistle was Rs. 14.
After then, Obi Ltd. fixes the above-mentioned error by producing a debit note that is issued to Jackson Enterprises.
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Conclusion
A debit note and a credit note are forms of financial records used to fix invoice problems.
The direction in which they impact the connected accounts is their primary distinction. While a credit note lowers the recipient's need to pay, a debit note raises it.
In other words, a credit note is used when a supplier has to provide a refund or make a correction to an invoice that has already been issued, and a debit note is used when a supplier needs to make an additional charge.
FAQS related to Differences between a debit note and credit note
1. Why would someone use a debit note?
When the initial invoice was incorrect, or the conditions of the original transaction changed, a debit note is used to let the receiver know that they now owe more money.
2. What is a credit note used for?
A credit note is used to let the receiver know that their debt will be reduced; this generally happens as a consequence of an error on the original invoice or a return of goods.
3. What distinguishes an invoice from a debit note?
An invoice is a request for payment for products or services provided, whereas a debit note is used to make corrections to an invoice and raise the recipient's obligation to pay.
4. How are credits and refunds different from one another?
A refund is the real return of money to the receiver, whereas a credit note is a decrease in the amount due by the supplier to the recipient.
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