What Is a Debit Note, and How Does It Work?

Debit Note

Investopedia / Dennis Madamba

What Is a Debit Note?

A debit note is a document used by a vendor to inform the buyer of current debt obligations, or a document created by a buyer when returning goods received on credit. The debit note can provide information regarding an upcoming invoice or serve as a reminder for funds currently due. For returned items, the note will include the total anticipated credit, an inventory of the returned items, and the reason for their return.

Key Takeaways:

  • A debit note is separate from an invoice and informs a buyer of current debt obligations.
  • A debit note is also a document created by a buyer when returning goods received on credit.
  • In the case of returned items, the note will show the credit amount, the inventory of the returned items, and the reason for the return.

Debit Note

How a Debit Note Works

A debit note, also known as a debit memo, is generally used in business-to-business transactions. Such transactions often involve an extension of credit, meaning a vendor sends a shipment of goods to a company before the buyer's cost is paid. The note tells the buyer that the seller has debited their account. Although real goods are changing hands, real money is not transferred until an actual invoice is issued. Debits and credits are instead logged in an accounting system to track shipped inventories and payments owed.

Debit notes are separate from invoices because they are generally formatted as letters, and they may not require immediate payment. This is true when the debit note is used to inform the buyer of upcoming debt obligations based on amounts that have yet to be officially invoiced.

Alternate Forms of Debit Notes

Some companies use debit notes to bill for items that are not their primary business. For example, if a company sublets some of its warehouse space, it might issue a debit note for the rent. Debit notes might also be used to correct mistakes in invoices. If a client is underbilled on an invoice, for example, a debit note might be issued for the missing amount that should have been billed.

In addition to the letter format, debit notes may also be provided as shipping receipts with received goods. While the amount due may be noted, payment is not expected until an official invoice is sent to the buyer. This can allow a buyer the opportunity to return goods, if necessary, without first having to provide payment.

Some debit notes may be sent as informational postcards that only serve as a reminder of the debt the buyer has accrued. This can be helpful in cases where the seller is not certain if an original invoice was received or reviewed. The postcard can also contain information on how the debt can be settled, such as relevant contact information.

Debit Notes as Optional Documents

Not all companies choose to send debit notes to buyers with outstanding or pending debt obligations. Generally, a seller either considers it a standard business practice and uses it according to internal procedures or does not use it at all. In some cases, a buyer can request a document with the information contained in a debit note to meet internal recordkeeping requirements.