In the business-to-business (B2B) world, order and transaction values can be large. When they change unexpectedly, financial challenges can quickly arise.
Such instances can complicate invoice processing operations, which in turn can negatively influence the order-to-cash (O2C) process.
Thankfully, there are things a business can do to mitigate the impact – including debit notes and credit notes.
Let’s examine these options as well as their similarities and differences.
What is a debit note?
Debit notes (or debit memos) are documents for both notifying businesses of credit owed and requesting its repayment.
Debit notes formalize requests for a return of credit purchases. They are issued by buyers to sellers via the same channels as invoices.
Besides the amount of debt owed, a debit note also lists other details relevant to the transaction. These include item details, dates, reasons for issuance, etc.
Is a debit note an invoice or credit?
A debit note is neither an invoice nor a form of credit. It is a notification and record of a debt obligation.
What is a credit note?
Credit notes (or credit memos) are documents issued as receipts for erroneous or changed invoices or orders.
They are issued by the supplier to the customer and can cover all – or just some – of an invoice’s value.
Without them, bookkeeping and credit records would be difficult to manage. The removal of old invoices and the creation of new ones would confuse invoice number sequencing and audit trails.
Is a credit note a refund?
A credit note is similar but not the same as a refund. The former is a delayed return of a specific credit value to a buyer, whereas the latter is a direct repayment to them.
Credit notes achieve almost the same result as refunds via different means. Almost, because whilst a monetary refund and future goods and services might amount to the same credit value, they still aren’t the same thing.
Perhaps, for example, a business has less need for particular goods or services when it redeems a credit note.
Credit notes also assume an ongoing relationship between supplier and buyer. Refunds don’t.
Are credit notes and store credit the same thing?
Credit notes and store credit are similar but again they are not the same.
The ‘credit note’ definition is used in B2B to describe documents used to help balance accounting books.
Store credit is an umbrella term mostly used in B2C contexts. It covers vouchers given as gifts, by loyalty schemes, or in exchange for returned products.
Debit note vs credit note: The key similarities
1. Purpose: notification
Both debit and credit notes are used as a form of notification.
The recipient of both kinds of note might (or might not) be aware of an issue – or change in – an order or transaction.
Or they might not be fully aware of its details. In other words, each kind of note gives clarification on the negative amount (or positive amount) owed.
2. Purpose: accounting records
Debit notes and credit notes are both essential documents for accounting records. Without them, audit trails would be missing crucial information.
3. Reasons for issuance
There are several main reasons why debit and credit notes need to be issued.
Orders might be mistaken, damaged, or simply not arrive as described or on time. They might differ in volume, size, form, quality or timing. Buyers might reject them or sellers might realize their error.
B2B orders can be complex and might be subject to change after an invoice has been correctly issued. If the order value is decreased, the supplier account payables department will issue a credit note. If the order increases, it will issue a debit note.
Invoice mistakes are not uncommon. They can range from accidentally overcharging to forgetting to add discounts offered by a sales team. Debit and credit notes help correct each incorrect payment and accounting entry caused by these errors.
4. Issuing flexibility
Debit and credit notes can be sent out before or after invoices are received by the buyer.
If an invoice has not been issued yet, a credit note is added to it which will subtract its total cost. If it has been already been issued, the credit note will be included with the next invoice.
5. Issuing channels
Both debit notes and credit notes should be sent through the same channels as regular invoices, i.e., accounts departments.
6. Formatting of notes
Both debit and credit note formats are similar to invoices. They include:
- Issuing and recipient companies’ names, addresses, bank details, and contact details
- Date of note issuance
- A serial or identification number or code specific to the note
- Details of relevant goods or services relevant to the note – including volume, order number, order date, item rates, total cost, etc.
Debit note vs credit note: The key differences
1. The note issuer
Credit notes are issued by the suppliers, whereas debit notes are issued by buyers or sellers.
2. Accounts payable vs accounts receivable
A debit note reflects a buyer’s accounts receivable. It’s recorded in the purchase return book. A credit note reflects the buyer’s accounts payable. It’s recorded in the sales return book.
3. Acknowledgment vs request
A credit note signifies the issuer’s acknowledgment of credit owed.
A debit note represents a request for credit to the seller. In some cases, it might be disputed.
Credit and debit notes vs dunning
Dunning is a part of invoice processing and B2B collections. It covers notifications and communications around recovering unpaid invoices.
Like a debit note, it is a reminder of an outstanding payment. And like a credit note, it is issued by the seller.
However, it is related to an existing invoice(s), not alterations to existing invoices.
How to reduce debit note and credit note issuing
Debit and credit notes are a normal part of B2B relationships and payments. They are primarily a means to maintain a clear accounting record.
However, in some cases, the persistent need to issue debit or credit notes might be a symptom of a wider collections or cashflow issue for suppliers or their sellers.
Improving B2B collections processes or using or providing B2B financing are options that can potentially remedy this.
Debit notes and credit notes are documents used for business accounting.
A debit note is a notification and request for a debt obligation to be paid. A credit note is issued to correct errors or changes made to an existing invoice or order.
The issuance of both types of notes helps to maintain accounting records and provide clarification on the negative or positive amount owed.
They have similarities, such as their purpose and reasons for issuance, but they also have some key differences, such as which party issues them and whether they impact the buyer or seller’s account payables or account receivables.
Debit and credit notes are a normal part of the invoicing process. However, if a company has cashflow issues, it should think about ways to optimize its internal processes such as providing B2B financing options to customers. This provides a practical alternative to purely cash-based transactions.