Both credit and debit notes are concepts that occasionally baffle the accounting students. Yet for running a business they are as important as other things like UPI transaction limit per day. Click here to learn more.
Hence it is imperative that you understand these and the differences between them.
Before we dive into the differences between a credit and a debit note, let us quickly understand what each of them is.
A debit note lets suppliers, who receives goods and merchandise from a buyer, know that the customer is returning them because they are defective. In most cases, the buyer will also list the reason for the returned goods on the debit note.
A credit note acts as a sales return that is given to the buyer or the customer of the product by the seller. A credit note can be applied in any situation wherein a customer or a buyer is returning items he has previously purchased from your store. This can be used as an alternative to presenting a cash refund to him when you find that these items are still in acceptable condition.
In addition to their nature and purpose there are several differences between the two as listed below:
1. A seller issues the credit note whereas a debit note is issued by the buyer
2. A debit note is used to create an asset whereas a credit note is used to create a liability. Hence the debit note is positive as it shows a credit balance while the credit note is negative as it shows a debit balance.
3. A debit note uses blue ink while the credit note uses red ink in their prints
4. When a debit note is issued there is a reduction in the account receivables. However, when a credit note is issued it leads to a decrement in the account payables.
5. When a debit note is issued the purchase return book needs to be updated whereas when a credit note is issued the sales return book needs to be updated.
6. A debit note is a type of purchase return of goods whereas a credit note is a type of sales return of goods.
7. When a debit note is issued, the accounts of the seller or the supplier are debited whereas the purchase or return accounts for the buyers are credited. On the other side when a credit note is issued, the sales return accounts of the buyers are debited whereas the customers’ accounts of the sellers are credited.
8. If the invoice is undercharging or the supplier has sent more items on top of the ones mentioned in the original invoice after the original invoice was created, a debit note needs to be issued. In such cases, the buyer acknowledges the receipt of the debit note with a credit note.
Hence to conclude it is apparent that Credit note and Debit note both reflect the return of goods to the suppliers on account of higher/lower errors or correct quantities which are different from the agreed purchase order quantities. Both notes have similarities as well as differences. A credit note is always issued when there is a payment of money owing whereas a debit note can be issued for both types of transactions.