Debit Note | Debit Notes Accounting & its Top Characteristics

What is Debit Note?

Debit note is sent by the purchaser of goods to the seller of the goods. The reason for sending this note is intimating the seller about debiting the sales account.

The debit note can be sent for various reasons –

• The most important reason is purchase return. When a percentage of goods have defects, then the purchaser sends a note stating that they would reduce the purchase account by a certain percentage.
• Another reason for sending this is when the purchaser is overcharged for the goods not sold. It may happen that the seller will erroneously inflate the buyer’s account and by sending a note the seller is intimated about that.
• The last reason for sending a debit note is just the opposite of the above reason. It is when the buyer’s account is undercharged. Then also, the purchaser sends a debit note to the seller.

Also, do have a look at debit note vs credit note

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Accounting for Debit Note

To understand the concept of debit note, we need to dig deep. That’s why we will see how it affects the books of accounts of both buyer and seller.

We will take an example to illustrate this.

Let’s say that MNC Company has bought goods worth of $40,000 from S&S Traders. And MNC Company finds out that 2% of the total goods purchased are defective. MNC Company would issue a debit note stating the same. What would be the journal entry in MNC Company’s books of accounts?

First of all, we will pass the journal entry and then will investigate why we pass these journal entries.

S&S Traders A/C…….Dr      800     –

To Purchase A/C                    –      800

To understand this, we need to go back to the time when MNC Company purchased the goods from S&S Traders.

Since MNC Company purchased goods worth of $40,000 from S&S Traders. The journal entry for this would be –

Purchase A/C…….Dr    40,000      –

To S&S Traders A/C         –         40,000

Here, purchase account is debited because the expenses increased. And S&S Traders account is credited because the liability increased as S&S Traders is the seller of goods.

To, minimize the purchase (because there’re defective products found), we’re reversing the entry only by the amount which is found defective.

The purchase account that is credited for the defective amount is actually a purchase return. But as a purchase can be reduced for multiple reasons and it can be issued for various causes, we won’t credit “purchase return” account.

Many argue that “purchase return” account should be credited and not “purchase” account. There’s an accounting explanation for that.

If we take the same example, we will see that entry of purchase would be –

Purchase A/C…..Dr    40,000    –

To S&S Traders A/C                    –        40,000

Now, if there’re 2% defective products found, the entry would be two-fold –

S&S Traders A/C……Dr          800      –

To Purchase A/C          –        800

Purchase A/C…….Dr         800    –

To Purchase Return A/C     –      800

Doing this will create the right effect in ledgers and as a result, the business will be able to enter the similar effect in the final accounts and balance sheet as well.

 

Characteristics of a Debit Note

Now as we have understood what a debit note is and how the accounting entry is passed, we will look at the most significant characteristics of a debit Note –

• Sent by the purchaser: Debit note is always issued by the purchaser. The purchaser wants to inform the seller that the seller’s account is being debited due a particular reason. And the reason is also mentioned in the note along with the intimation of debiting seller’s account.
• Purchase return book is affected: After issuing this note, credit purchase is reduced and purchase return is increased. So the definite entry would be to reduce the purchase first and then pass the entry where we will debit the purchase and credit the purchase returns.
• It is done only on credit purchase: When the purchaser buys goods on credit and he feels that the amount of purchase needs to be reduced due to one of the many reasons like defective products, erroneously increasing purchase amount etc. this note is issued.
• It is positive for the purchaser: It is positive for the purchaser because the purchaser would need to pay less due to debiting the seller’s account. That’s why the amount which is debited is called the positive amount.
• The result of acceptance: Only when this note is accepted by the seller, a debit note has value; because after acceptance of the debit note, the seller issues a credit note which states that the debiting of seller account is accepted and the seller will also make necessary changes in his books of accounts.

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This has been a guide to Debit Note and why is it issued? Here we also discuss the accounting of credit notes and its characteristics. You can also learn about basic accounting from these articles below –

• What is Trial Balance? 
• Reconciliation of Books
• Bookkeeping vs Accounting
• Debit vs Credit