Understanding Debit Note and Credit Note

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It is great news to share with your friends and community when you start a business. You may struggle
hard to overcome many initial glitches and find your first success and it feels great to deliver your
service or product to your client. But, it does not stop there! Once a product or a service is delivered,
you need to bill your client. For the first few times or for the few clients the billing process can be easy.
However, once you are in the business and are growing, you need to have a proper accounting system
in place. Furthermore, you should make it a practice from the beginning to manage a proper system
and make note of your transactions. One such method is using the debit note and credit note system.

Now, you will certainly think that invoicing is the only step of the process. Understand that an invoice
is just the first document you exchange with your customer in which you mention the charges of your
product or service. What if the product you sold or the service you offered is in excess than what the
customer required or what if there is some defect in the product or service offered? In this case, you
need to have a few more sets of documents. They are called a debit note and credit note respectively.

Know what they are, their format, and how to use them.

What is a Debit Note?

The client or the buyer or the customer issues a note to the seller, service provider, or the supplier
requesting to refund or adjust the payment made in the event of faulty goods sold.

In general, the debit meaning is the account entry resulted in an increase or decrease in assets or
liabilities respectively on a company’s balance sheet.

The ideal time to present a debit note (GST Compliance)

 Tax invoice is prepared and issued and the taxable amount is less than the actual tax
 Tax invoice is sent and tax charged is less when compared to the tax paid

What is a Credit Note?

On the other hand, a credit note is issued by the seller to the buyer in the event of failing to deliver
the product or service. The supplier voluntarily comes forward to refund the invoice in part or whole.
The invoice cannot be deleted and thus a credit note must be issued for adjusting the payment.

Meaning and Examples:

Debit and Credit Note Scenario - Khatabook

Let us take a look at two use cases of issuing a Debit Note and Credit Note:

Why Issue a Credit Note? (GST Compliance)

 When the client returned goods in part or whole

 Offered service is delayed or not meeting the client’s expectation
 Client accepts only partial product and rejects the remaining but the invoice is made for the whole
product
 Seller included more tax rate than the actual tax
 Invoice prepared by the vendor is more than the actual goods offered to the buyer

Debit Vs Credit Note

Debit and Credit Note Format

Both the formats can be made in MS Excel, MS Word, or PDF. However, with the advancement in
technology, you can have it handy in your smartphones too. Irrespective of where you have it, the
format remains the same which must contain the following details. There needs to be only minor
tweaking between a debit note and a credit note.

GST guidelines should be followed while making a credit or a debit note.

 Heading – Mention Debit Note or Credit Note

 Create a serial number for each financial year and provide a unique one for every note sent
following the suggestion given below.
 Let it not be more than 16 characters
 Let it contain alphanumeric characters with special characters like dash, slash, a hyphen, etc.
 Mention the date when the note is issued
 Add invoice number and invoice date for reference
 Include the sender’s name, contact details, and GSTIN (Goods and Service Tax Identification
Number)
 Add recipient’s contact details, and GSTIN (Goods and Service Tax Identification Number)
 Similarly, add recipient’s delivery address, name, and contact number
 Date and serial number that corresponds to the bill or the tax invoice must be added
 After that, add the value of the service or the product offered (taxable amount) including the tax
debited details
 End it with a digital signature of the supplier/buyer

Note: Supplementary invoice is the other name referred to the debit note and credit note.

Points to Remember when Preparing a Debit or a Credit Note:

 All amount entered in a credit note must be negative likewise in a debit note it must be positive.
 Maintain the debit or credit note for 6 years from the due date of furnishing the yearly tax return.
 It is important to present a debit or a credit note as per GST law and the registered party must
issue this document.
 Issue credit note earlier to the date of filing yearly returns or 30th Sept of every financial year.
However, there is no time restriction to issue a debit note. It is because the debit note is beneficial
to the government for tax collection, on the other hand, credit note reduces the tax liability.
Therefore, remember to stick to timelines when you issue a credit note.
53. What is the difference between credit and debit notes?

What is a credit note?

A credit note is issued when a credit has been made in the account of a client. The seller issues a credit
note to the buyer informing them about the credit that has been provided in their account. This often
occurs due to return of goods to the supplier and it has a negative impact on the accounting balance
of the seller. Find a more detailed article with credit and debit documents here Support

What is a debit note?

An invoice is made for each purchase or supply of goods or services. If for various reasons the supply
falls short due to certain reasons, or extra goods are being delivered to the purchaser, then the seller
will issue a debit note. This debit note with note the upward revision of prices in an already issued
invoice and will inform the purchase of any future liability that they will have to pay.

Debit notes are made in cases where a tax invoice that has been previously issued, in which the taxable
value of the goods from the invoices has changed after the date of issue.

What is the difference between credit note and debit note?

To put it simply, the difference between credit and debit note is that in credit notes you record money
that you owe to a client due to a downward revision in an invoice and in debit notes you record money
that a client owes you due to upward revision in an invoice.

A debit note is issued when there is a purchase return and reduces receivables, while a credit note is
issued when there is a sales return and reduces payables.
The Use of VAT Credit and Debit Notes

Under the Value Added Tax 2010 for the purpose of credit mechanism a VAT invoice must be issued
at all times by VAT registered businesses for any business to business transactions. There are many
reasons whereby after an invoice has been issued, an adjustment has to be made to the initial price.
These adjustments must be accounted for on the VAT return for the particular VAT period in which
the increase or decrease has occurred. For that reason a VAT credit or VAT debit note is issued to
indicate that an adjustment has been done to reflect the changes in the initial price.

Circumstances where a VAT credit or VAT debit note must be issued

A VAT credit or VAT debit note is used for the purpose of making an adjustment in relation to the VAT
invoices. After the transaction has taken place, the VAT Act 2010 requires that either a VAT credit or
VAT debit note be issued when the following happen rather than correcting the initial invoice:

 Supply of goods or service is cancelled or goods are returned to the supplier

 An incorrect price was charged on the tax invoice
 A discount is granted to the purchaser
 The nature of the goods or services changed resulting in a change in the transaction
 Mistakes on the amount on the invoices

When to use a debit note and when to use a credit note

How to account for VAT Credit and VAT Debit Notes?

If an adjustment has been made for a VAT credit or a VAT debit note, it is therefore very important
that the appropriate changes are done to all specific or related records when changes are made to a
transaction. There must be adequate and specific information on the VAT debit or VAT credit note to
be able to identify the VAT invoice that it relates to namely:

 The words debit note or credit note must appear in a prominent place
 The name, address, and TIN number of the supplier
 The name, address and TIN number of the recipient (purchaser)
 The VAT Invoice serial number
 Date on which the VAT debit or VAT credit note was issued
 The value of supply on the invoice, the correct amount of the transaction, the difference
between the two amounts and the VAT charged on the differences
 Brief explanation of the reason for issuing the debit or credit note

The VAT registered business that issues a VAT credit or VAT debit note has to reflect such adjustment
by reducing or increasing the output tax reported on its next VAT return. Likewise a VAT registered
business that receives a VAT credit or VAT debit note has to reflect such adjustment by reducing or
increasing the input tax credit reported on its next VAT return.
It is important to note that a VAT registered business as a recipient has a maximum of 60 days to
obtain a VAT credit or VAT debit notes from the supplier from the date of the event. If a registered
business makes a request for a VAT credit or VAT debit note to a supplier, then the supplier must
comply with the request within 14 days after receiving it.
Credit note or Debit note - VAT Treatment

What is Credit note or Debit note?

A credit note /debit note is a commercial document issued by a supplier/seller to a buyer.

A Credit notes act as a document to evidence the reduction of value in sales and is issued in various
situations to correct a mistake, such as when an invoice amount is overstated, the correct discount
rate is not applied, goods are faulty / do not meet the buyer›s specifications and are returned to the
supplier fully or partially.

Conversely, a debit note reflects an increasing adjustment to consideration to a previously issued Tax
Invoice for a supply of goods or services by the supplier.

For VAT purposes, the credit note reflects a decreasing adjustment to consideration to a previously
issued Tax Invoice for a supply of goods or services by the supplier.

Circumstances of Issuing a Credit Note or Debit Note

A credit note or debit note in the following cases where a Tax Invoice has already been issued in
relation to a Taxable Supply, and one of the following events occurs:

Cancellation of Supply or contract: The Supply is cancelled or terminated after the Supply has taken
place or been treated as taking place, in whole or in part. Including the return of advance cash
received.

Modification of Contract or supply: There is a material change or alteration to the nature of the Supply
resulting in a change in the Tax charged.

Discount or adjustment due to rejections or error in the invoice: The previously agreed Consideration
for the Supply is altered for any reason, including due to an offer of an additional discount after the
sale was made

Return: The Goods or services or part thereof is returned to the Supplier and the Supplier accepts such
return.

VAT Treatment

Scenario I :

If the credit note or debit note, occurred in the same Tax Period in which the original supply was made,
or before the Tax Return for that original supply has been filed:

Adjust the Output Tax for the Tax Period in which the original supply took place.

Scenario II :

If a credit note is issued (reducing the value of Original invoice) after the Tax Return for that original
supply has been filed:

Adjust the Output Tax for the Tax Period in which the Credit note is issued, or the event giving rise to
the adjustment took place, whichever is later. There is a separate column in the tax return for these
adjustments.
Scenario III :

If a debit note (increasing the value of the original invoice) is made after the Tax Return for that original
supply has been filed:

Adjust the Output Tax (upwards) for the Tax Period in which the event giving rise to the adjustment
took place

Timing for Issue of a Credit note or debit note to the customer

A Credit Note or Debit Note should be issued upon the adjustment to consideration (a maximum time
limit is not provided in law but the Authority considers that, in line with the provisions for issue of Tax
Invoices, these documents should be issued by no later than fifteen days following the end of the
month in which the adjustment happened). The date of issue must be marked on the Credit Note or
Debit Note.

Format for Credit note or Debit note

The credit note or debit note issued must contain -

a reference to the sequential number of the Tax Invoice issued in respect of the original Supply,

and the information required by Regulations to be shown on the corresponding Tax Invoice(50).

There are no other specific format requirements for a credit note or debit note, but it should be clear
the adjusted value of the supply and original VAT charged related to the adjustment.

One Credit note for adjustments to multiple supplies

A single credit Note or debit note may be issued to reflect adjustments to multiple Tax Invoices issued
for the same customer. In such a case, the credit note or debit note should clearly reference all original
Tax Invoices which are being adjusted and the corresponding adjustment amount.
What is Debit Note, Credit Note and Revised Invoice? How to Revise Already Issued Invoices Under
GST?

What is Debit Note and Credit Note?

When goods supplied are returned or when there is a revision in the invoice value due to
goods (or services) not being up to the mark or extra goods being issued a Debit Note or
Credit Note is issued by the supplier and receiver of goods and services.

A debit note or a Credit Note can be issued in 2 situations –

1. When the amount payable by buyer to seller decreases –There can be a change in the
value of goods after the goods are delivered and invoice is issued by the seller. This
can be due to a return of goods or due to the bad quality of the goods delivered, [Link]
this case, the value of goods decreases due to which a Debit Note is issued by the
purchaser to the seller. The Debit Note provides details of the amount of money
debited from the sellers’ account and also states the reason for the [Link] reason
behind this – In the purchaser’s books of account the seller will have a credit balance.
When a debit note is issued the credit balance of the Sellers account decreases, thus
reducing the seller’s balance. It means that that lesser amount is required to be paid
by the buyer to the seller to settle his liabilityy. Thus debit note reduces the liability for
the [Link] seller issues a Credit Note as a response or acknowledgment to the
Debit Note
2. When the amount payable by buyer to seller increases-When the value of invoice
increases due to extra goods being delivered or the goods already delivered have been
charged at an incorrect value a Debit Note is required to be [Link] Debit Note, in
this case, is issued by the seller to the buyer. And the buyer as an acknowledgment to
the receipt of Debit Note issues a Credit [Link] reason behind this – In the seller’s
books of account the buyer will have a debit balance. When a debit note is issued the
debit balance of the buyer’s account increases. It means that more amount is required
to be paid by the buyer to the seller to settle his liability. Thus, credit note increases
the liability for the buyer.
Debit Note under GST
Cases when Debit note is to be issued by supplier:

Credit Note under GST

Cases when Credit note is to be issued by supplier: