Debit notes are a form of proof that one business has created a legitimate debit entry in the course of dealing with another business. This might occur when a purchaser returns materials to a supplier and needs to validate the reimbursed amount. In this case, the purchaser issues a debit note reflecting the accounting transaction.
A business might issue a debit note in response to a received credit note. Mistakes (often interest charges and fees) in a sale, purchase, or loan invoice might prompt a firm to issue a debit note to help correct the error.
- A debit note is a written transaction that states one business has taken financial action as a result of dealing with another business; the note corresponds to a debit note in an accounting log.
- Business-to-business transactions use both debit and credit notes; all notes are dated, include a serial number, description of the transaction, details of the return, and the signatures of the people involved.
- An under-billed invoice that a supplier later sought to remedy would be a typical example of a debit note; a store returning products to its supplier and looking to get reimbursed would be another example.
Debit Notes in Transactions
Debit notes and credit notes are almost always involved in business-to-business (B2B) transactions. They correspond to debit and credit entries in accounting logs, which further serve as proof of a prior business transaction. They may also be referred to as debit memos.
Debit notes usually all include the same general information: the date of the note, a serial number, a brief description of the prior business transaction, details of items returned (including sales taxes and a reference to the invoice), and the signatures of appropriate company authorities.
Debit notes, debit memos, debit receipts, and invoices are all similar in nature and are all legitimate documents that demonstrate financial transactions between businesses.
You are most likely to hear about a debit note following an under-billed invoice. Suppose a supplier shipped $10,000 worth of materials to a client, but only sent an invoice for $9,500. Upon realizing its mistake, the supplier could submit a debit note to its client for the difference of $500 to resolve the issue and make any proper adjustments to its accounting records.
There is some ambiguity between the terms "debit note" and "debit receipt." Sometimes a debit receipt is used interchangeably with a debit note; at other times, debit receipts are meant only to describe written records that prove a customer owes money to a company. It is rare to see the term debit receipt used for B2B transactions.
A debit note or debit receipt is very similar to an invoice. The main difference is that invoices always show a sale, where debit notes and debit receipts reflect adjustments or returns on transactions that have already taken place.
B2B transactions are typically based on an extension of credit, where a vendor sends a shipment to a company before getting paid, then invoices the company for the amount owed after delivery. Debits and credits are the accounting method used to keep track of these transactions.
Debit notes can also be substituted for traditional invoices when a good or service is provided that is outside of the normal scope of business. This helps distinguish the transaction for both accounting departments, and also keeps the issuing company from creating a new type of invoice.
Think of debit notes as claims against business errors. In the case of returned goods from a purchaser to a vendor or supplier, the debit note shows the change in the accounting logs and requests a return of funds (credit). The supplier/vendor often sends a credit note as proof of the reversal.
For instance, consider the case where company XYZ returns material to its supplier, company ABC. To prove the amount it should be reimbursed, XYZ drafts a debit note. The original purchase was for $5,000, so the debit note should reflect the cost of materials plus local sales tax rates. The taxes and cost of goods should always be separate line items in the note.
Upon receipt, ABC should create a small credit note as proof of understanding, then proceed to reimburse (or offer credit to) XYZ (so long as the debit note contained correct information).
Suppose one business owes interest to a creditor or commission to a third party for services rendered. In such a case, the debit note is normally issued to respond to a received credit note, but a debtor could always issue one unprompted.
Commission receivable debit notes are common between parent companies and subsidiaries. Interest receivable debit notes can be used to adjust prior payments or as a simple form of record keeping.
The Bottom Line
Debit notes are used in transactions when a debit entry adjustment is required in a case where money is owed. They are primarily found in under-billed invoices where a supplier has sent an invoice to a customer for a lower amount than the actual cost, when interest or commission is owed, or claims against business errors. A debit note will stipulate the amount of money owed from one party to another.