Whenever two parties enter a transaction of purchase and sale, an invoice is raised. An invoice is a list of goods or services bought by the purchaser and statement of the sum amount to be paid for such a purchase. In the business world, majority of the transactions are made on credit, i.e. payment is made at a later date. Sometimes, there might be a revision in prices or taxable amount mentioned in the invoice, return of goods due to defects, or extra goods being issued. In such cases, a Debit Note or Credit Note is issued by either the supplier or receiver of goods.
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A Debit Note is issued by the seller or buyer of goods and services, to inform the other party, that a debit has been effected to their account. A Debit is an accounting entry that results in either an increase in assets or reduction in liabilities on a company’s Balance Sheet. A debit note reduces the liability of the buyer. The buyer issues a debit note to the seller when he is returning goods found to be unsatisfactory. The seller issues a debit note to the buyer, when he has mistakenly undercharged the buyer or supplied additional items on the same original invoice.
A Credit Note is issued to inform that a credit has been effected to the account of the party. Effecting a credit refers to an accounting entry that either decreases assets, or increases liability and equity on the company’s Balance Sheet. A credit note increases the liability of the buyer. The seller issues a credit note to the buyer informing about the credit that has been provided in the buyer’s account. The buyer issues it to the seller if he has noticed that the seller has undercharged or sent more items than billed. The seller or buyer also issues a Credit Note as a response to the Debit Note issued by the other.
A Debit Note or a Credit Note can be issued for 2 reasons:
The value, as mentioned in the original invoice, payable by the buyer to the seller can reduce. This can be due to return of defective or unsatisfactory goods. This reduces the value of goods received by the buyer, so he issues a debit note to the seller. The debit note states the reasons for reduce in amount payable. This reduces the liability of the buyer. The seller issues a credit note in response to the debut note received from the buyer. Once a tax invoice is issued, the taxable amount may change or may be found to be overstated. In this case, the seller issues a credit note to the buyer to inform him of the reduced tax burden, which effectively translates to lesser amount payable by the buyer.
The amount payable by the buyer may increase for any of the following reasons. The seller has undercharged or sent more items than were billed. The taxable amount has increased due to change in applicable taxes or a mistake in the original invoice. In such cases, the seller issues a debit note to the buyer, informing him of the additional amount payable. The buyer issues a credit note in response to the debit note issued by the seller.
Every business transaction has come under the purview of GST, so businesses must maintain and upload every single transaction. Debit notes form a major part of the transaction; and they must be reported in the GST returns. Debit Notes are explained under Section 2(38) of the GST Law.
Cases where debit note must be issued:
The Debit Note also includes a supplementary invoice.
The issuance of a debit note or a supplementary invoice creates additional tax liability. The treatment of a debit note or a supplementary invoice would be identical to the treatment of a tax invoice as far as returns and payment are concerned.
Debit Notes are explained under Section 2(37) of the GST Law.
Cases where credit note must be issued:
The person who issues a credit note in relation to a supply of goods or services must declare the details of such credit note in the return for that month, but not later than September, following the end of that financial year, or the date of filing annual return, whichever is earlier. The tax liability of the supplier gets reduced once the credit note is issued and it is matched.
There is no prescribed format, but the debit note issued must have the following details:
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