Debit notes and credit notes are official documents for accounting purchase and sale returns in B2B (Business-to-Business) transactions.
Most professional buyers may ask for these two documents during the order operation and payment process. Most sales are confused when customers need these two documents. Here we would explain the meaning of these two documents and their differences.
A debit note is a document that is issued by a seller to a buyer when goods or services are received. It is a debt obligation that shows the amount that the buyer should pay to the seller. A credit note, on the other hand, is a document that is issued by a seller to a buyer to indicate the amount that the buyer can deduct from the debit note for return goods due to quality issues or other problems.
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What is a Debit Note?
When company A receives goods or services from company B, company B will issue a debit note to company B to ask for the payment.
This invoice will include all of the pertinent information about the transaction, such as the date, the items that were received, and the amount that is owed. It is typically used to document the transaction between two businesses to track the flow of money between two businesses, and ensure that everything is properly accounted for.
What is a Credit Note?
A credit note is used to cancel an amount that has been charged on a debit note, which is typically used when a customer returns goods that they have purchased.
When your customer returns goods for quality issues or other problems, you will issue them a credit note. This invoice will show the amount that will be canceled out from the originally issued debit note. Therefore the customer can use the credit note to reimburse themselves for the goods that they have returned.
A Debit Note and A Credit Note Difference Example
Debit notes and credit notes are corresponding. To put it simply, one is borrowing and the other is lending. In accounting terms, they’re opposites. I will use a case to illustrate it, and it will be easy for you to understand.
Suppose you send a batch of goods to the customer, the customer should pay you 50,000 USD for these goods. But unfortunately, 20% of these goods have quality issues. After the customer complains to you, you agree to compensate the 20%, and you allow the customer to deduct 10,000 USD from the payment of this time, therefore the customer will finally pay you 40,000 USD.
However, according to the business practice, you need to issue a 10,000 USD credit note before the customer gets your authorization and can deduct this amount when paying. Without your credit note, the customer is not entitled to debit you. This is business practice.
A debit note is just the opposite. If the customer wants to pay you 50,000 USD for goods, plus pay you 10,000 USD for the mold fee. However, he only paid you 50,000 USD based on your PI (Proforma Invoice), and he’ll ask you to issue a debit note to pay for the other 10,000 USD to you.
In conclusion, in B2B business, when a seller sends a debit note to a buyer, the buyer will pay the amount based on the debit note. When a seller sends a credit note to a buyer, the buyer will deduct the amount on the credit note.
A debit note is typically used to account for the purchase of goods or services, while a credit note is typically used to account for the return of goods or services.