What is Debit Note?
Debit note is a note sent by the purchaser of goods to the supplier of the goods when a percentage of goods have defects and it states that they would reduce the purchase amount payable after adjusting for the defective goods. 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. It can also be sent when the buyer’s account is undercharged.
Also, do have a look at debit note vs credit noteDebit Note Vs Credit NoteBoth the debit notes and the credit notes are issued in the situation involving the return or cancellation of goods and services by one party to another, where debit note is issued by the buyer of goods and services if it is returned back to the vendor whereas the credit note is issued by the seller of goods and services if it is returned back to him by the purchaser.
Accounting for Debit Note with Example
To understand the concept of debitThe Concept Of DebitDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits. 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, the 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 [wsm-tooltip header="Reversing Entries" description="Reversing entries refer to those journal entries passed in the current accounting period to offset the entries for outstanding expenses and accrued income recorded in the immediately preceding accounting period." url="https://www.wallstreetmojo.com/reversing-entries/"]reversing entriesReversing EntriesReversing entries refer to those journal entries passed in the current accounting period to offset the entries for outstanding expenses and accrued income recorded in the immediately preceding accounting period.[/wsm-tooltip] only by the amount which is found defective.
The purchase account that is credited for the defective amount is 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 the “purchase return” account.
Many argue that the “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 they’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 a similar impact on 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: The purchaser always issues debit note. The purchaser wants to inform the seller that the seller’s account is being debited due to a particular reason. And the reason is also mentioned in the note along with the intimation of debiting the seller’s account.
- Purchase return book is affected: After issuing this note, credit purchase is reduced, and purchase return is increased. So the correct 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 the amount of purchase needs to be reduced due to 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 the seller accepts this note, a debit note has value; because then, the seller issues a credit note stating acceptance of debiting of seller account, and the seller will also make necessary changes in his books of accounts.
Debit Note Video
This article has been a guide to Debit Note and its meaning. Here we discuss the accounting for debit notes along with practical examples, its characteristics, and reasons for its issuance. You can also learn about basic accounting from these articles below –