What is a debit note (debit memo)?
– A debit note (also called a debit memo) is a written record a seller issues to notify a buyer that the buyer’s account has been increased—that is, the buyer owes more. It is commonly used in business-to-business (B2B) transactions when goods or services are supplied on credit, or when an adjustment (such as correcting an undercharge) is needed. Buyers can also prepare debit notes when returning goods to document the expected credit from the supplier.
Key points, in plain language
– Purpose: to notify or document an increase in the buyer’s liability or an adjustment to a prior transaction.
– Not the same as an invoice: an invoice is a formal bill for a sale; a debit note is usually a notice or adjustment and may not demand immediate payment.
– Opposite of a credit note: a debit note increases what is owed; a credit note reduces it.
– Formats vary: a debit note can be a short letter, a shipping receipt, or an internal memo depending on company practice.
Why vendors and buyers use debit notes
– Seller issues a debit note when: correcting an underbilled invoice, billing for extra services outside normal invoicing, or reminding a buyer about a pending charge.
– Buyer prepares a debit note when returning goods received on credit to request an adjustment or anticipated credit on their account.
– Companies may treat issuing debit notes as standard practice or omit them depending on internal procedures.
Typical features to include (short checklist)
– Unique debit note number or reference
– Date of issue
– Seller and buyer names and contact details
– Reference to original invoice or purchase order (if any)
– Clear description of goods/services, quantities, and unit prices
– Amount being debited and currency
– Reason for the debit (e.g., underbilling, additional service, restocking fee, return)
– Terms or next steps (e.g., “credit note to follow,” contact details)
– Authorized signature or issuer name
Step-by-step: how a seller might issue a debit note
1. Identify the need (undercharge, extra
…additional service, restocking fee, return). Gather the original invoice, purchase order, delivery/receiving slips, and any correspondence that explains why the amount changes.
2. Calculate the adjustment precisely. Show math, round consistently, and account for taxes. Example: original invoice = $10,000; additional charge = $1,200. New amount due = $10,000 + $1,200 = $11,200. If VAT/sales tax applies, compute tax on the additional amount and show both net and tax components.
3. Prepare the debit note document. Reference the original invoice number and date. Use your template or accounting software so fields match your invoice/credit-note system; include an explicit reason for the debit and any tax breakdown. (If your organization uses a buyer-issued debit note convention, follow that internal rule.)
4. Make accounting entries (seller perspective). A debit note increases what the buyer owes. Typical journal entry for the seller when issuing a debit note that increases revenue:
– Debit: Accounts Receivable (Customer) — amount of the debit note
– Credit: Sales (or appropriate revenue account) — same amount
Numeric example (seller): Debit Accounts Receivable $1,200; Credit Sales $1,200.
If the debit note includes taxable amounts, split the credit between Sales (net) and Output Tax Payable (tax component) per your tax rules.
5. Send the debit note and confirm delivery. Email the buyer and attach supporting documents; include a contact and expected next steps (e.g., “please post to your accounts payable and include in next payment run”). Track acknowledgment.
6. Follow up and reconcile. If the buyer accepts, ensure the
…buyer posts the debit note to their accounts payable ledger and you post it to your accounts receivable ledger so both sides’ books agree. Below are practical next steps, journal examples, common exceptions, controls, and closing items.
Post the agreed entries
– Seller (issuer of the debit note): post the debit to Accounts Receivable and the matching credit to Sales (and Output VAT Payable if tax applies).
– Numeric example (taxable): Debit Accounts Receivable $1,200; Credit Sales (net) $1,000; Credit Output VAT Payable $200.
– Buyer (recipient of the debit note): post the debit to Purchases (or Inventory/Expense) and the matching credit to Accounts Payable (and Input VAT Recoverable if allowed).
– Numeric example (taxable): Debit Purchases $1,000; Debit Input VAT Recoverable $200; Credit Accounts Payable $1,200.
Recording settlement
– When the buyer pays, the seller clears AR and records cash. Example: Buyer pays the $1,200.
– Seller: Debit Cash/Bank $1,200; Credit Accounts Receivable $1,200.
– Buyer: Debit Accounts Payable $1,200; Credit Cash/Bank $1,200.
– If the buyer applies the debit note against a future invoice (offset), both parties should record the offset: reduce AR/ AP and remove the related sale/purchase impact per accounting policy.
If the buyer disputes the debit note
1. Pause collection actions and flag the item in the ledger.
2. Promptly gather supporting evidence: original contract/PO, delivery notes, timesheets, earlier correspondence, and the calculation that produced the debit.
3. Reconcile differences by phone and in writing; document agreed outcomes.
4. If the buyer is correct, issue a credit note (a document that reduces or reverses a previous invoice/debit). Example entries to reverse a $1,200 debit note:
– Seller (reverse): Debit Sales $1,200; Credit Accounts Receivable $1,200.
– Buyer (reverse): Debit Accounts Payable $1,200; Credit Purchases $1,200.
5. If the buyer accepts part of the amount, record partial credit and adjust AR/AP accordingly.
Partial acceptance or offset arrangements
– If the buyer agrees to pay only part now and offset the remainder against future invoices, document the agreement (email or signed amendment), and reflect the partial payment plus the amount carried forward as a credit memorandum or an open offset in AP/AR.
Foreign currency considerations
– If the debit note is in a foreign currency, record the transaction using the spot exchange rate on the date of posting. Later remeasure outstanding AR/AP at reporting-period rates; post any exchange gains or losses to the income statement.
– Example: Debit note 1,000 EUR issued when USD/EUR = 1.10 → AR = $1,100 recorded. If rate moves to 1.05 at period-end, remeasure AR to $1,050 and record an exchange loss of $50.
Tax reporting and corrections
– If the original sale and tax were already reported to the tax authority, check local VAT/GST rules for issuing corrective documents (credit notes, adjustments) and the timing required to claim or remit tax adjustments.
– Keep separate tax component lines in the journal entries to make filing and reconciliation straightforward.
Controls and best practices checklist
– Use sequential numbering for debit notes; keep an electronic audit trail.
– Require manager approval for debit notes above a threshold.
– Match debit notes to the corresponding purchase order (PO) and delivery/receiving documents (three-way match: PO, goods receipt, supplier invoice/debit note).
– Reconcile AR and AP aging reports regularly; investigate items older than your payment terms.
– Retain supporting documents for the statutory retention period in your jurisdiction.
Common pitfalls to avoid
Common pitfalls to avoid
– Missing or unclear reason. Failing to record why a debit note was issued (returned goods, underbilling, pricing dispute) makes reconciliation and audit difficult. Remedy: require a short standardized reason code on every debit note.
– Not matching supporting documents. Issuing or accepting a debit note without attaching the related purchase order (PO), goods receipt, supplier invoice, or return shipping documents breaks the three-way match (PO, goods receipt, invoice). Remedy: make matching mandatory before posting.
– Incorrect tax treatment. Omitting the tax component or applying the wrong tax rate causes filing errors and potential penalties. Remedy: show tax as a separate line and verify local VAT/GST rules before posting.
– Posting to the wrong accounting period (cutoff errors). Delayed debit notes can distort period-end payables/receivables and financial results. Remedy: post in the period related to the underlying transaction or use a suspense account with timely reconciliation.
– Weak control of numbering and authorization. Non‑sequential numbers, duplicate numbers, or no approval path create fraud and audit risk. Remedy: enforce sequential numbering and approval thresholds.
– Currency and exchange differences ignored. For foreign-currency transactions, failing to remeasure the payable/receivable to current rates can produce mismatches. Remedy: revalue balances per your accounting policy and record FX gains/losses.
– Poor communication with the counterparty. Not confirming the debit note can lead to disputes and delays in supplier acknowledgments or issuing credit notes. Remedy: require supplier acknowledgement and track resolution status.
Step-by-step: creating and processing a debit note (checklist)
1. Identify discrepancy and collect evidence: PO, goods receipt, invoice, photos or RMA (return merchandise authorization) if goods are faulty.
2. Calculate amount due: net value, tax (VAT/GST), and any freight or restocking fees.
3. Prepare debit note: assign next sequential number, include dates, supplier/buyer details, PO reference, item lines, tax amounts, currency, reason code, and contact person.
4. Obtain internal approval
5. Send the debit note to the supplier and request acknowledgement
– Send via the agreed channel (EDI, vendor portal, email with PDF, or postal mail).
– Request supplier acknowledgement (date, contact, and reference). Track acknowledgements in a simple ledger or AP system field.
6. Supplier response and settlement pathway
– Supplier issues a credit note (a supplier-issued document that reduces the supplier’s invoice balance) or proposes an alternative (replacement goods, partial credit, or dispute escalation).
– If a credit note is issued, match its number and amount to the debit note and the original invoice.
7. Record accounting entries and tax adjustments
– Make the adjusting journal entries once the debit/credit is agreed or per your accounting policy (some entities wait for supplier credit; others book a provision if likely). See worked example below for typical entries.
– Adjust VAT/GST or sales tax liability as required by local tax rules and the timing rules in your jurisdiction.
8. Reconcile and close the transaction
– Update the AP/AR ledger: reduce accounts payable (buyer) or accounts receivable (supplier) by the agreed amount.
– Close or flag the debit note as “Resolved” with the resolution date, corresponding credit note number (if any), and who approved/closed it.
9. Post-resolution controls and audit trail
– Keep copies of the debit note, supplier acknowledgement/credit note, supporting evidence (PO, goods receipt, photos), and internal approvals for the retention period required by tax and audit rules.
– Reconcile outstanding debit notes on a regular schedule (e.g., monthly) and age unresolved items.
10. Review and improve process
– Periodically review root causes (shipping errors, pricing mistakes, receiving discrepancies) and update controls (e.g., three-way match: PO, goods receipt, invoice) to reduce recurrence.
Quick checklist (one-page)
– Evidence collected: PO, GRN (goods received note), invoice, photos/RMA.
– Calculation: net amount, taxes, freight, restocking.
– Document prepared: sequential number, dates, full contact details, reason, currency, references.
– Internal approval obtained.