Examples of Debit Notes in Business-to-Business Transactions
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Debit notes are a form of proof that a business has created a legitimate debit entry in the course of dealing with another business. This might occur when a purchaser returns materials to a supplier and needs to validate the reimbursed amount. In this case, the purchaser issues a debit note reflecting the accounting transaction.
A business might issue a debit note in response to a received credit note. Mistakes (often interest charges and fees) in a sale, purchase, or loan invoice might prompt a company to issue a debit note to ensure that the accounts are accurate.
Key Takeaways
- A debit note is a written transaction that states one business has taken financial action as a result of dealing with another business.
- The note corresponds to a debit note in an accounting log, serving as a record of a revision.
- Business-to-business transactions use both debit and credit notes.
Debit Notes in Transactions
Debit notes and credit notes are used mostly in business-to-business (B2B) transactions.
They correspond to debit and credit entries in accounting logs, serving as documentation of a prior business transaction. They may also be referred to as debit memos.
An example of a debit note would be a corrected invoice for an earlier under-billed invoice from a supplier. Another example would be a retailer seeking reimbursement after returning products to its supplier.
Debit notes include the same general information: the date of the note, a serial number, a brief description of the prior business transaction, details of items returned (including sales taxes and a reference to the invoice), and the signatures of appropriate company authorities.
Fast Fact
Debit notes, debit memos, debit receipts, and invoices are similar documents. All are records of financial transactions between businesses.
You are most likely to hear about a debit note following an under-billed invoice. Suppose a supplier shipped $10,000 worth of materials to a client, but only sent an invoice for $9,500. Upon realizing its mistake, the supplier would submit a debit note to its client for the difference of $500 to resolve the issue and make any proper adjustments to its accounting records.
Debit Receipts
There is some ambiguity between the terms debit note and debit receipt. The terms are sometimes used interchangeably.
However, a debit receipt customarily means a written record indicating that a customer owes money to a company. It is rare to see the term debit receipt used for B2B transactions.
Invoices
A debit note or debit receipt is similar to an invoice. The main difference is that invoices always show a sale, while debit notes and debit receipts reflect adjustments or reversals of transactions that have already taken place.
Important
B2B transactions are based on credit. Vendors send shipments to companies and invoice the companies for the amounts owed only after delivery. Debits and credits are the accounting methods used to keep track of these transactions.
Debit notes can be substituted for traditional invoices when a product or service is delivered that is outside of the normal scope of business. This helps distinguish the transaction for both accounting departments and keeps the issuing company from creating a new type of invoice.
Material Returns
Debit notes can be seen as claims against business errors. In the case of returned goods from a purchaser to a vendor or supplier, the debit note shows the change in the accounting logs and requests a return of funds (credit). The supplier or vendor often sends a credit note as proof of the reversal.
For example, say company XYZ returns material to its supplier, company ABC. To record the amount it should be reimbursed, XYZ drafts a debit note. The original purchase was for $5,000, so the debit note should reflect the cost of materials plus local sales tax. The taxes and cost of goods should be separate line items in the note.
Upon receipt, ABC would create a small credit note as proof of understanding, then proceed to reimburse (or offer credit to) company XYZ.
Interest/Commission Receivable
Suppose one business owes interest to a creditor or commission to a third party for services rendered. In such a case, the debit note is normally issued to respond to a received credit note, but a debtor could always issue one unprompted.
Commission receivable debit notes are common between parent companies and subsidiaries. Interest receivable debit notes can be used to adjust prior payments or as a simple form of record keeping.
When Are Debit Notes Most Often Used?
Debit notes are most often used to adjust an outstanding balance due when goods have been returned to a vendor. They could be viewed as requests for a balance adjustment or credit.
What Is the Purpose of a Debit Note?
Debit notes, used only in business-to-business dealings, keep the books straight on both sides of a transaction. They resolve discrepancies that occur only after a transaction appears to have been completed.
Can I Use Business Software to Create Debit Notes?
Yes. Major business-to-business accounting software products allow businesses to create debit notes as needed.
The Bottom Line
Debit notes are issued when a debit entry adjustment is required because money is owed. They are primarily found in under-billed invoices. That is, a supplier has sent an invoice to a customer for a lower amount than it should have charged.
A debit note stipulates the amount of money owed by one of the parties to the other.
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