Debit Note

Debit note a document issued by the salesman to the buyer or vice versa; prapared in order to reduce the amount of money that needs to be paid. It's created by the customer to inform the salesman that his account has been charged for the reasons specified therein. The debit note includes the date of return and the name of the seller to whom the goods were returned. All details of the returned goods and reasons for returning are mentioned, too. Each note is numbered. The debit note is usually printed in black. The debtor's account must be charged every time he has been sent a debit note.

Issuing debit notes

These corrections are made by means of debit notes and credit notesand require many procedures such as:

• In the case of a return, an amendment of the amount is required, customers may reduce the amount due to the seller.
• After purchasing the goods, the buyer credits the seller's account.
• If some parts of the goods are returned to the merchant, the value of the returned items is not to be paid and needs to be deducted from the amount.
• Technically, the merchant's account will be charged with the amount of goods returned to him. In this case, the buyer will send the debit note to the seller, which means that the salesman's account is debited with the amount of goods returned to him.
• After getting his goods back and receiving the debit note, every salesman is obliged to send a credit note to the customer, which means that the merchant has credited the buyer's account with the value of the goods returned to him.
• A debit note may also be given by the seller to the buyer if the amount of the facture is short or the price is calculated at lower rates.
• All in all, the seller will charge an amount exceeding the facture value from the buyer, so he will be obliged to send the debit note to the buyer.
• After that, the buyer will be able to send the credit note to the seller instead.

When is a debit note sent:

1. When the goods are returned by the customer to the salesman.
2. When returned defective, damaged or unsatisfactory goods.
3. When an excessive charge was calculated in the facture.

The settlement and documentation of debit notes

The settlement of debit notes, either by issuing an invoice or proof of customer responsibility, depends on the actions of all other departments:

• production,
• engineering,
• quality control,
• sales, shipping,
• invoicing

None of them is fully interested in taking time on these inquiries. It often happens that the credit manager is obliged to activate people who are beyond his control. That control can be divided into two parts:

1. Records
2. Investigation

The proper records of all debit notes need to be stored, probably in the credit department, in any order that is just useful - e.g. according to the customers or groups of products. Clients should be asked to send their notes to the appropriate person responsible for these files. International instructions should be given to ensure that all debit notes are forwarded to the credit department. It's often necessary to establish a separate section in the credit department for performing debit note control. For large accounts that have a fixed number of debit notes, it's a good idea to keep the record card (the history and status of each subject) A copy of each incoming debit note should be given to the appropriate person / department with a request for clarification. It must be continued. If the complaint is not accepted, it is necessary to send an explanation to the client (saving a copy for the credit department). Likewise, the issue of partial credit should also be covered by a letter.

Examples of Debit Note

• A company sends a debit note to a customer for a service rendered or goods delivered, which contains details such as the amount of money due, the date of delivery, and the payment terms.
• A customer sends a debit note to a supplier for any discrepancies in the invoices and bills received, such as an incorrect amount, or a delayed delivery or payment.
• A business may send a debit note to an employee for any deductions made from their salary, such as deductions for taxes, insurance or other deductions.
• A company may send a debit note to an employee if they have been overpaid, or if the employee has been reimbursed for an expense they were not entitled to.
• A business may also send a debit note to an employee if they have not followed proper procedures, such as submitting an expense report late, or if they have made an error in their work.

Advantages of Debit Note

A debit note is a document used to reduce the amount of money that needs to be paid for a transaction. It can be issued by either the buyer or the seller, and the advantages of using a debit note include:

• Quicker transaction times: Debit notes can be processed quickly, allowing the buyer and seller to complete the transaction much faster than otherwise.
• Reduced paperwork: Debit notes reduce the amount of paperwork that needs to be done for a transaction, making it simpler and faster.
• Improved accuracy: Using a debit note helps to ensure that the correct amount of money is paid and received, reducing the risk of errors.
• Easier tracking: The use of debit notes makes it easier to track payments and keep track of transactions.
• Increased confidence: Using a debit note can give both the buyer and seller increased confidence in the transaction, as it provides a formal document that can be easily referred to.

Limitations of Debit Note

Debit notes are an important tool for businesses, but they also come with some limitations. Below are some of the key limitations of debit notes:

• Limited Use: Debit notes are usually limited to specific types of transactions. For example, debit notes can be used to adjust the amount of money to be paid for goods or services, but they cannot be used to effect a payment.
• Delayed Payment: A debit note can be used to reduce the amount of money due to the recipient of the debit note, but it does not provide immediate liquidity.
• Administrative Burden: Creating and managing debit notes can be labor intensive, as each debit note must be tracked and accounted for separately.
• No Legal Protection: Debit notes do not offer any legal protection to the issuer or recipient, and their validity is not legally binding.

Other approaches related to Debit Note

Debit notes are commonly used in accounting and finance to reduce the amount of money that needs to be paid between two parties. However, there are also other approaches to reduce the amount of money that needs to be paid. These approaches include:

• Offsetting or netting of debts, where two parties exchange invoices to reduce the amount of money owed between them;
• Payment discounts, where the buyer is offered a discount for prompt payment;
• Negotiation of payment terms, where the buyer and seller decide on payment terms such as deferred payment or installment payments;
• Payment plan, where the buyer and seller agree on a payment plan to pay off the debt over a period of time;
• Debt consolidation, where the buyer and seller combine multiple debts into one payment;
• Settlement of debts, where the buyer and seller agree to settle the debt for less than the original amount;
• Debt forgiveness, where the seller agrees to forgive the debt in full or in part.

In summary, there are various approaches to reduce the amount of money that needs to be paid between two parties, such as netting, payment discounts, payment terms, payment plans, debt consolidation, settlement, and debt forgiveness. Debit notes are one approach to reduce the amount due, but there are also other approaches that can be used.

Footnotes

Debit Note — recommended articles

Cheque requisition — Purchase account — Purchase invoice — Purchase ledger — Receiving report — Sales ledger — Contra deal — Back Charge — Documents against acceptance

References

• Bass R.M.V. (1991) Credit Management: How to Manage Credit Effectively and Make a Real Contribution to Profits, Nelsom Thornes
• Mcgraw-Hill T. (2009) Qb In Accountancy XI Tata McGraw-Hill Education
• Thompson-Hosein F. (1988) Principles of Accounts Heinemann
• Siddiqui S.A. (2011) Comprehensive Accountancy XI Laxmi Publications
• Tulsian P.C. and Tulsian S.D. (2003) Isc Commerce 2nd Edition Ranta Sagar

Author: Katarzyna Maziarka