Understanding the concept of Debit Note and Credit Note :
In Accounting, you issue an invoice for Sale or receive an invoice for Purchase.
When for Purchase & Sale, an invoice is used, then why Debit note and Credit note also are issued?
Debit Note :
What is Debit Note Means?
While accounting Purchase, the Vendor account will get Credited for the liability to pay. Sometimes the payable may need to reduce due to Purchase returns or discount offered after receipt of an invoice etc..
While reducing liability for payment, the purchaser has to issue Debit Note for the same.
To understand in a different way, For purchase, the vendor account is credited. To reduce the payable Debit note is issued.
Credit Note :
What is a Credit Note Means?
While accounting Sales, the Customer account will get Debited for Receivables. Sometimes the receivables may need to be reduced due to Sales return or discounts are given after issue of invoice etc..
While reducing receivables, Seller has to issue a Credit Note for the same.
To understand in a different way, For Sales, the Customer account is Debited. To reduce the receivable, a Credit note is issued.
When the purchaser issue Debit note, he must ask a credit note from the seller to record the transaction. Because the reduction in liability must be confirmed by Seller or supplier of service.
Practical approach :
After raising & serving an Invoice, if the goods are returned or service contract is revised towards the lower side etc., the Purchaser/service receiver must ask for credit note from seller or service provider to account such reduction.
Eg. Ganesh Enterprise receives the invoice from Reliance for internet service of Rs. 50,000 as per the monthly billing contract. Thereafter got the waiver of charges of Rs. 8,000 for a service issue. The proper way of accounting is as below, which also is followed by MNC Companies & Big Audit house also suggest the same.
- Ganesh Enterprise must account invoice of Rs. 50,000 with full value.
- Then account the credit note of Rs. 8,000 received towards waiver of service charge.
With the receipt of a credit note, the purchaser has evidence of waiver from seller & in future after a couple of years, change in Finance / Sales team if any, a new team from the vendor will not ask for differential payment because of the Credit note is in place at both parties.
Simple, there should be evidence of a reduction in liability.
