Debit Note Meaning Format Examples Accounting Entry

Debit Note Meaning

This document is crucial for business-to-business transactions. Sometimes sellers also send such a note stating the buyer’s debtDebtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more obligations. Both the parties issue documents to rectify incorrect values in the invoice. Usually, debit notes are issued when goods are purchased on credit.

Key Takeaways

A debit note is a document released by a buyer for returning goods bought on credit. Debit notes are also called debit memos. In addition, it is used for various other purposes like a rectification of a wrong invoice, change in order quantity, change in taxes, etc. The document becomes valid only upon acceptance. Notes sent by buyers contain crucial details—the reason for return, quantity, price, and the number of goods returned.

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Explanation

A debit note is also known as a debit memoDebit MemoA debit memo is a document that is used to increase the billing of a service or goods, or to record a transaction between a customer and a seller. The major reason to raise this memo is the possibility of a price hike in the products being sold.read more. So, buyers send debit memos to sellers if they return the goods or service. It is, therefore, an official, articulated form of a purchase return. Buyers inform the seller that they are returning the goods and mention their reasons. Further, when buyers receive debit memos, they approve them and then send back a credit noteCredit NoteA credit note is a financial document that sellers provide to buyers as a token of confirmation against registered returns. It acknowledges the cancellation and lets the sellers make a credit entry to the buyers’ account for the required amount. read more.

Alternatively, sellers also send debit memos to buyers—informing the buyer of pending debt obligations.

Now, let us understand the reasons for issuing debit memos. A buyer issues a debit memo to initiate purchase return for goods procured on credit when:

The goods delivered by the supplier are not up to the mark—defective, damaged, or inappropriate in size, shape, or quantity;The supplier fails to deliver the goods or services on time;Goods or services are overbilled—calculation errors;Higher taxes are applied on goods or services;The buyer no longer wants to make the purchase.

A seller also issues a debit memo under the following circumstances:

When seller requires adjustments in the invoice;When the seller changes (increases) the billing amount;When the buyer Increases the order quantity;To remind the buyer of their current debt obligations.

Features

To understand what exactly a debit note is, we will look at some of its most significant features:

Issued on Credit Purchase: When goods or services are purchased on credit, a debit memo accompanies.Issued by Buyer or Seller: Buyers send this document to a seller, listing out details of the purchase return. VendorsVendorsA vendor refers to an individual or an entity that sells products and services to businesses or consumers. It receives payments in exchange for making items available to end-users. They constitute an integral part of the supply chain management for providing raw materials to manufacturers and finished goods to customers.read more also issue this document when invoices contain mistakes.Requires Acceptance: The document becomes valid only when the sellers accept the debit memos—sellers make necessary changes in their books of accounts.States the reason: in the debit memo, the buyer clearly mentions the reason for returning the goods.Shown in Purchase Return Book: This note reduces the buyer’s credit purchase amount and increases the purchase return figures. In accounting entriesAccounting EntriesAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. read more, the purchases are debited, and purchase returns are credited.Reduces Buyer’s Debt Obligation: From the buyer’s perspective, the debit memo is a positive amount that will curtail their liability towards the seller.

Debit Note Format

A debit memo comprises the following details:

Company name (Issuer);Issuer’s address, zip code, phone number, and web address;Date of creating the debit memo;Order number for which it is issued;Date of placing the order;Order terms and conditions;Customer Id—as stated in the invoice;Company name (Buyer);Buyer’s address, zip code, phone number, and email id;Name of contact person (Buyer);Invoice details—item name (goods or services), item description, the reason for debit, quantity, price, and total amount;Approval details— date, name and designation, and signature of the issuer’s representative.

Debit Note Accounting

Now, let us find out the accounting entries in the books of buyers and sellers. When a buyer purchases goods on credit and then returns them, the following entries are made:

In the buyer’s books of accounts:

Earlier, the buyer had debited the Purchase A/c and credited the Supplier’s A/c. Therefore, upon return of some or all of the goods, the supplier will debit the Supplier’s A/c (reduction in the debt obligation) and credit the Purchase ReturnPurchase ReturnPurchase return journal entry is to record the transaction of return of the merchandise purchased from the supplier. The cash account debits in case of the cash purchases or the accounts payable account in case of the credit purchases, and the purchase return account will be credited.read more A/c.

The adjusting entryAdjusting EntryAdjusting Entries in Journal is a journal entry made by a company at the end of any accounting period on the basis of the accrual concept of accounting. Companies are required to adjust the balances of their various ledger accounts at the end of the accounting period in order to meet the requirements of the various authorities’ standards.read more would be as follows:

When the goods are received at the seller’s end, their books of accounts show the following:

To understand the above entry, we need to have a look at the following adjusting entry:

As there is a reduction in the credit salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more due to the return of sold goods, the Sales A/c is debited. Also, the Sales ReturnSales ReturnThe term sales return is used in payroll journal entry to account for customer returns in the books of account or to account for when a customer returns goods sold owing to defect goods sold, or misfit in the customer’s requirement, etc.read more A/c is credited. Similarly, in the above accounting entry, the Sales Return A/c is debited, and the DebtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. read more A/c is credited owing to a decrease in receivables for the seller.

Debit Note Example

Let us assume that MNC Ltd has bought goods worth $40,000 from S&S Traders. Upon delivery, MNC Ltd found out that 2% of the total goods purchased are defective. The company issues a debit memo stating the same. What would be the journal entryJournal EntryA journal entry example would be the country’s purchase of machinery, where the machinery account would be debited and the cash account would be credited.read more in MNC’s books of accounts?

Solution:

Let us start with the calculation of purchase return:

Purchase Return = 2% of Total Purchase Value

Purchase Return = 2% of $40000 = $800

Journal Entries:

In the books of MNC Ltd (buyer):

In the books of S&S Traders (seller):

Debit Note Meaning Format Examples Accounting Entry