Debit Note

What is a Debit Note?

A debit note is a commercial document, common in business to business (B2B) transactions, that either buyers or sellers may use regarding the amount due for a sale of goods or services. It is essentially an additional note related to an invoice, usually indicating the need to adjust the invoiced amount.

Debit notes come into play because B2B sales are commonly made on credit, meaning goods or services are provided to the buyer from the seller before an invoice being paid. In the interim, the buyer or the seller may enter a debit note or credit note in their accounting records to keep track of amounts due.

Debit Notes from Buyers

A debit note sent by the buyer to the seller of goods or services, related to a purchase invoice, indicates an adjustment to the original invoiced amount. (It is assuming that an invoice’s already been created by the seller and sent to, and received by, the buyer. If there is not yet an existing invoice, then the debit note indicates an adjustment that needs to be included when the seller creates an invoice.) The adjustment is in the buyer’s favor – that is, it indicates a reduction in the amount due to the seller from the buyer. It is effectively a credit for the buyer and a debit for the seller.

So, why and when does a buyer issue a debit note? A debit note is most commonly created when part of a delivery or shipment of goods is being returned to the seller because the returned goods are damaged or defective. The debit note accompanies the returned goods, explaining in adequate detail to the seller why the goods are being returned. Also, it indicates the amount by which the seller needs to adjust its invoice to the buyer, reducing the amount due for the sale by the appropriate amount.

A buyer might also issue a debit note because the seller failed to the goods within an agreed-upon time or date or by or on a specified date.

If the buyer’s already paid the full invoice from the seller, then the debit note may indicate a partial refund due to the buyer or obligate the seller to provide a credit amount to the buyer’s account that will reduce the amount due for future purchases.

Example

Assume that Company A makes a credit purchase of 10,000 widgets from Company B at an agreed-upon price of $1.00 per widget. Company B delivers the order for 10,000 widgets and subsequently creates and sends an invoice for $10,000 to Company A. However, upon inspecting the widgets on receipt of them, Company A’s warehouse staff finds that 580 of the widgets are damaged and unusable.

Company A will then create a debit note to be sent to Company B along with the return of the 580 damaged widgets, and indicating that Company B needs to, accordingly, debit the amount due from Company A by $580.00.

Following the transaction:

• Seller will debit its accounts receivable by $580
• Buyer will credit its accounts payable by $580

Debit Notes from Sellers

Debit notes that are sent by a seller to a buyer usually serve one of two purposes. First, a debit note may be sent simply to serve as a reminder of an amount due for a previously invoiced sale. In such a case, the debit note is just a “bill payment due” reminder.

Second, a seller may send a debit note when it discovers a need to amend a submitted invoice, increasing the amount due from the buyer. For example, the seller may discover that it invoiced the buyer for $6,000 when the actual amount due for the sale is $7,000. It will then send a debit note to the buyer for the additional $1,000, along with an explanation for the change in the invoiced amount.

Learn More

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA®) certification, designed to teach you all the knowledge and skills required to become a skilled credit analyst. The following CFI resources will help further your financial education and advance your career:

• Accounts Payable
• Express Warranty
• Journal Entries Guide
• Source Documents
• See all accounting resources