Credit Note vs Debit Note: Do Not Miss 11 Key Differences

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A contractor, irrespective of businesses, is accountable for issuing both credit and debit notes on different occasions, such as credit sales or credit purchases. Since both sound similar, oftentimes one might get confused. To avoid the surge of hassle, you must have a clear understanding of what a debit note and credit note is.

The challenge with a credit note and a debit note is which to issue when. To quickly answer this, we have two scenarios.

For example, if you are a contractee/customer and receive any damaged goods or goods not meeting your expectations, you return and expect a credit note from the contractor.

On the other hand, if you sell goods on credit or there is a credit purchase, and the payment is to be made in the future, you issue a debit note to the customer if there is a price rise. Another scenario when you issue a debit memo is when you acknowledge the credit memo.

This is not the end of the story; there is a long list of differentiation when it comes to credit note vs debit note. So check them out and know which to use, when to use, and how to use them.

Before discussing the differences in detail, let us put some light and understand both the notes in brief.

What is a Credit Note?

A credit memo, aka a credit note, is a written piece of document created by the contractor to inform the customer about the difference amount the latter party is entitled to receive.

Following are the circumstances under which the sellers issue a credit memo to the customers:

  • Overstated invoice amount
  • Missing out on applying discounts on some products
  • Incorrect discount rate applied
  • Incorrect goods dispatched to the purchaser
  • Disappointed with the services
  • Customer receives damaged goods

The effects or results of issuing a credit note is, it reduces accounts payable in the customer account.

To know in-depth detail about a credit note, you can go through the linked article. It includes every single piece of information that you must know.

Now that you have a brief idea about a credit note, let’s understand a debit note.

What is a Debit Note?

A debit note or debit memo is an articulated form of purchase return created by the customer to inform the contractor about the amount the latter party has to give to the customer.

Another occasion when the debit memo is issued is when the customer buys goods with a promise to pay after 10 days, and meantime, there is a rise in the price of the raw materials.

For example, a customer buys goods worth $1000 with a promise to make the payment after 5-days. When sending goods, there is a rise in the price of transportation. In this case, the contractor will send a debit memo to the customer informing them about the current debt obligation.

Just like a credit note, issuing a debit note also requires reason(s), and the following are part of it:

  • Wrong goods received
  • On the account of credit sales, payments made in future
  • Seller delivers damaged goods
  • Incorrect cost or description mentioned in the invoice

Other essential information that debit note shows are:

  • Date of transaction
  • Unique identification number
  • Details about the original translation for which the debit note is issued
  • Sales tax
  • Signature

The effects or results of issuing a debit note is it reduces account receivables in the supplier account.

We have a separate and detailed article specifically written on a debit note or memo. You can go through the article for all the wealth of information.

Now that we have discussed a brief about both credit and debit notes, let’s know all the key differences.

11 Crucial Differences Between Credit Notes & Debit Notes

Points Credit Note Debit Note
Definition A credit note is issued by the contractor to the customer mentioning the amount the former party owes. A debit note is issued by the contractor to the customer, stating the reason for the debt obligation.
Who Issues to Whom? The contractor issues the credit note to the customer. The contractor creates a debit note informing the customer about the current due amount.
Reasons for Issue
  • Damaged goods received
  • Incorrect color, sizes, or the number of items received
  • Incorrect invoice amount
  • Overpriced amount
  • Invoice created before sending goods and later found an increase in the price of goods
  • Wrongly underbilling the goods
Purpose of the Issue Credit note is issued to notify the buyer’s account is credited, and the amount he/she is yet to receive. Debit note is issued to ensure a seller’s account is debited and is yet to receive a certain amount from a buyer.
Can You Reuse It? No No
What Does It Reflect? The credit note reflects a negative amount for the contractor. The debit note reflects a positive amount for the contractor.
What Happens Post-Issuing? Account Payables are reduced in the customer’s account Account Receivables are reduced in the supplier account.
What is the Accounting Entry? Sales Return A/C Dr.
Debtor’s A/C
Creditor’s A/C Dr.
Purchase Return A/C
What Color Ink Should You Use to Write? You must use red ink. You must use Blue ink to write a Debit note
What Is Exchanged Against? It is exchanged against a debit note. It is exchanged against a credit note.
Which Book is Updated? In the case of a credit note, the sales return book is updated. On the other hand, the purchase return book is updated.
What is the End Result? The sales account is settled. Finally, the purchase account is settled.

This is how debit note and credit note is differentiated. Still have concerns, queries, or questions, we have answered them in the next section.

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Frequently Asked Questions
  1. When should you raise a debit note?

    There are various occasions to issue a debit note. For example, when you (as a customer) acknowledge the issue of a credit memo. Secondly, when you (as a contractor) understated invoice and rectified in the future. Lastly, when you (as a contractor) make credit sales, anticipate a rise in price in the future, which actually increases.


  2. When should you raise a credit note?

    Contrary to a debit note, when you (as a contractor) realize that you have not properly applied discount rates, or there is an overstated amount mentioned in the invoice, you can issue a credit note. The credit note will inform the customer about the amount he/she is yet to receive.


  3. Does issuing a debit note and credit note have any accounting entries?

    Yes, every business transaction has an accounting entry. Here is how you can record the transaction:
    Credit Note

    • Creditor’s A/C Dr.
    • Purchase Return A/C

    Debit Note

    • Sales Return A/C Dr.
    • Debtor’s A/C

Conclusion

Both debit notes and credit notes are vital for any business since you would be using them at different times. It is a valuable piece of paper, and you cannot simply issue them without any prior checking or due diligence. We hope this article on debit note vs credit note delivers detailed information about both notes.

To create a credit note, you can . Use this free trial to create unlimited invoices and estimates. You also get several other features with this free trial. So don’t wait and get started.

Author Bio
Jeel Patel
Jeel Patel
Founder

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.

India

Delhi (Balbīrnagar)

IN