Last Updated on September 7, 2021
When we purchase goods, we must collect an invoice. After all, what will you do if you need proof of purchase? There may be situations that may lead to change in the value of invoices. You can’t edit the invoices, can you? That is where a debit note and credit note comes to the rescue.
Here, you will understand these incredible instruments. So, what are you waiting for? Let’s start.
Table of Contents
- What is a Debit Note?
- What is a Credit Note?
- Debit Note and Credit Note in GST
- Things You Should Keep in Mind
- Frequently Asked Questions (FAQs)
- The Bottom Line
What is a Debit Note?
As the name suggests, it is a document which states that a party’s account gets debited in the books of the sender of the debit note. In simple words, you can say that a buyer sends a debit note to the seller if he wants to return the goods due to defects or any other reason. Let’s understand it with an example.
Suppose you (XYZ) buy goods from a person (Let’s call him ABC) worth Rs 20k. But you found that the goods were defective. So, you return the goods to ABC. But merely doing so won’t fulfill the return transaction. You have to send proof of return of goods as well. So, you send a debit note to ABC stating that ABC’s account gets debited in your books.
If you know the concept of journal entries, you will be able to relate easily. When you purchase the goods on credit, you make the following entry in your books.
|Purchase A/c Dr|
To ABC A/c
In case of return of goods purchased, the above journal entry gets reversed. As the purchase transaction gets reversed as well.
|ABC A/c Dr|
To Purchase Return A/c
As you can see, the seller gets debited on the return of goods purchased. Hence, the name debit note.
Reasons to Issue Debit Note
Did you think that the buyer issued a debit note only in the case of purchase return? Well, you are not the only one. If you look closely, you will realize that the debit note is issued when the other party gets debited. Purchase return is simply one of the reasons.
Besides that, the buyer can issue a debit note when he receives less quantity of goods. He can also create it in case of an overcharge or discount agreed by the seller. Even more, the seller can issue a debit note if he undercharged the buyer by mistake.
What is a Credit Note?
A Credit Note is a document which states the party’s account gets credited in the books of the sender. Or, you can say that the seller sends a credit note if he delivered defective goods or other reasons. It is issued against the debit note issued by the buyer. In short, it is the opposite of a Debit Note.
Let’s take the same example as above. You (XYZ) issued a debit note to the seller (ABC) as you debited his account in your books. In the same way, ABC will issue a credit note for the same transaction. It will act as proof that the seller has agreed to the authenticity of the debit note.
Here are the journal entries which explain the logic. At the time of sale of goods, the entry in the books of ABC would be:
|XYZ A/c Dr|
To Sale A/c
But when the buyer returned the goods, ABC made the following entry:
|Sales Return A/c Dr|
To XYZ A/c
The credit note gets its name from the fact that the account of another party gets credited.
Reasons to Issue a Credit Note
As mentioned in Debit Note, sales return isn’t the sole reason to issue a credit note. Besides that, the seller can also create a credit note if he has overcharged the buyer. Or he has agreed to give a discount to the other party.
Even a buyer can issue a credit note if he believes that the seller has undercharged him. But that will happen once in a blue moon. After all, it is next to impossible to find such an honest man in today’s world.
Debit Note and Credit Note in GST
Besides the accounting use, a debit note and credit note are crucial, even in GST. They help in determining the value of supply. Based on it, the seller of goods and services has to pay GST. So, remember to create them as per the appropriate format to comply with the provisions of Goods and Service Tax.
To do so, you should include the following details:
- Name, address, and GSTIN of the supplier
- Unique serial number of the note
- Date of issue
- Name, address, and GSTIN (if applicable) of the recipient.
- The invoice number against which the note is to be issued
- The taxable value, applicable tax rate, and the amount of tax
- Stamp, seal, or signature of the seller
Things You Should Keep in Mind
There are some things you should keep in mind regarding the debit note and credit note. They are as follows:
- You can take the GST credit anytime through a credit note. But don’t forget that you have to take credit before September following the end of the year when the supply takes place.
For example, you sold goods in January 2021. So, the year of supply will be FY 20-21. Hence, you can avail of the credit before September 2021.
- Only the supplier will be considered legal for tax purposes. So, there will be no effect if the recipient issues one of them.
- You should retain them until the expiry of 72 months from the due date of filing the annual return of the time of supply. Considering the above example, you should retain the notes until August 2024.
Are you worried about GST compliance? Well, all your problems end here. With Enalo, you can create GST-compliant invoices with a ready-to-use template. You can also track accounts receivables and get real-time cash flow reports through an interactive dashboard.
Frequently Asked Questions (FAQs)
Q1. Can we claim ITC on a debit note?
Ans: A debit note reduces the aggregate turnover of the seller for the purpose of GST. So, you can claim ITC on a debit note. But you should consider the time limit mentioned above.
Q2: How do you create a Credit Note?
Ans: You have to create the credit note via the accounting software you use. Firstly, visit your dashboard of the website/application of the software company. Then, you will see an option to create a credit note. Afterwards, fill in the details and share the credit note with the buyer.
Q3: What is the difference between a Debit Note and a Credit Note?
Ans: A buyer issues a debit note in case of faulty goods, etc. to decrease the value of purchase. On the other hand, a seller issues a credit note in case a refund is to be made.
Q4: Is there any validity of a debit note?
Ans: There is no such concept in the case of a credit or debit note. But the seller can claim the Input Tax Credit benefit in GST up to September of next Financial Year. You can’t use it after that.
The Bottom Line
Due to some circumstances, there may be changes in the value of the invoice. And using a debit note and credit note is the most effective way to do the same. Besides accounting, they are also used in GST to adjust the turnover of the supplier. But remember the above things while using them.
Until next time.