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Credit Note Or Debit Note: What’s The Difference, And Why Are They Important?

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Masses of sales happen worldwide every day, so it stands to reason that many of these purchases will need to be returned. This can happen for many reasons, but it most commonly occurs because goods are faulty, a product has been lost or damaged in transit, or an item turns out not to fit. In fact, according to Statista, 88% of Americans have returned clothing at some point, and 44% have returned shoes. Other items seeing significant returns are electronics, home and garden products, hair and beauty items, and toys. With the invention of the internet and e-commerce, more purchases than ever are taking place each day, and sales returns are also becoming easier and faster to conduct, meaning online sales lead to more returns than those conducted in brick-and-mortar stores.

However, it isn’t just customers that need to return things. Sometimes businesses that buy from other businesses find the need to return items. When this happens, the two companies exchange debit notes and credit notes. These documents are often confused but are actually very different. However, they are both very important and play a crucial role in the returns process between companies.

Debit Note

A debit note is issued by the seller, supplier or purchaser when they are returning an item to a vendor. The vendor will normally receive the debit note along with the returned item. Debit notes are traditionally printed in blue ink, and they reflect the fact that the purchaser is now due money from the vendor. Debit notes normally state how much was debited from the purchaser’s account for the returned item, the vendor’s name, the purchaser’s name, and also details of the item that is being returned. A debit note is important because it notifies the vendor that a debit has been added to their account in the purchaser’s book. Debit notes represent a positive amount for the purchaser and will appear on the Purchase Returns Ledger.

Debit notes may also be issued if the purchaser has been overcharged for something, or when the purchaser undercharges the vendor’s account.

Credit Note

When an item is returned to a vendor with a debit note included, or when a debit note is received for any other reason, the vendor will issue a credit note to the purchaser to let them know that they have received it safely.  It will also notify them that there is now a credit on their account in the vendor’s book for that amount. Credit notes are always issued in exchange for debit notes. They are printed in red ink and represent a negative amount for the vendor. Credit notes appear on the Sales Return Ledger and tend to offset a previous invoice that’s already been paid.

Credit notes and debit notes are both important accounting documents that ensure business is conducted correctly, that accurate records of returns and incorrect payments are maintained, and that all ledgers balance. Whilst this can be done manually, the best way to do this is by using good accounting software like Xelix. Accounting software will enable you to issue both credit and debit notes in one place, keep a track of all your debts and credits, and also automatically balance your ledgers correctly.