I usually do not write on term definitions as there are lots of materials on the internet and other sources to cater for these. However, my readers and followers are the reason I set up this accounting blog some 10 years ago.
This article is written in response to a request from a subscriber to Accountant Next Door asking that I should explain the meaning of a credit note and a debit note. Let’s get straight to business.
What is a credit note?
In a simple term, a credit note is a document issued to those that we are obliged to pay an agreed amount in lieu of the payment. For example, let us assume that Hybrid Accountant is a trading venture dealing on FMCG with numerous customers all having their individual trade ledger with the company.
Let us also assume that Hybrid Accountant have an agreement with her customers to finance any contingent expenditure arising from unforeseen additional cost of delivering goods to their customers. For proper neat records to be kept by Hybrid Accountant a credit note worth the amount spent by each customer on each instance should be authorized and a credit entry made in that customers’ ledger.
The credit note authorizes the accounting and finance department staff to make a credit entry in the customers ledger. A credit note can also be presented at the point of payment in designated stores and outlets for relevant discount.
What is a debit note?
A debit note is a direct opposite of a credit note in the sense that its major function is to reduce the credit balance in a ledger. It can be used to surcharge a customers account if need be.
What are the uses of a credit note?
- Reducing debt
- Reimbursing vendors
- Transferring balance between ledgers
What are the uses of a debit note?
- Increase / add debt to a ledger
- Facilitating payment plan
- Accepting debit balance from another ledger
Contents of credit and debit notes
- Company name at the top
- Names of parties involved
- Name of document (credit note or a debit note)
- Unique reference number
- Description of transaction (particulars)
- Amount involved
In this article on meaning of credit note and debit note, I have provided answers to the following questions; (i) what is a credit note?, (ii) what is a debit note?, (iii) what are the uses of credit note?, (iv) what are the uses of debit note?, (v) what are the basic contents of a credit and debit note. All these I did avoiding the use of technical accounting jargons.
I hope you enjoyed reading this piece, please kindly share with your network.