Debit Note: What It Is and How It Works

What Is a Debit Note?

A debit note is a document used and issued by a vendor to inform the buyer of current debt obligations. It can provide information regarding an upcoming invoice or serve as a reminder for overdue payments.

Buyers can also create debit notes when returning goods received on credit. For returned items, the notes will include the total anticipated credit, an inventory of the returned items, and the reason for their return.

How a Debit Note Works

A debit note is typically used in business-to-business (B2B) transactions involving an extension of credit. In these transactions, a vendor ships goods to a buyer before payment is made.

Debit notes tell the buyer that the seller has debited their account. Although real goods change hands, real money isn't transferred until an actual invoice is issued. Instead, debits and credits are logged in an accounting system to track shipped inventories and payments owed.

Debit notes are separate from invoices because they're generally formatted as letters, and they may not require immediate payment. This is especially true when the debit note informs the buyer of upcoming debt obligations based on amounts that have yet to be officially invoiced.

Special Considerations

Some companies use debit notes to bill items outside of their primary business. For example, if a company sublets some of its warehouse space, it might issue a debit note for the rent. Debit notes can also be used to correct invoice errors. If a client is underbilled, a debit note may be issued for the missing amount.

In addition to the letter format, debit notes might also be provided as shipping receipts with delivered goods. While the amount due may be noted, payment is not expected until an official invoice is sent to the buyer. This can allow a buyer to return goods, if necessary, without first providing payment.

In some cases, debit notes may be sent as informational postcards that only serve as a reminder of the debt the buyer has accrued. These postcards may be helpful when a seller is uncertain if an original invoice was received or reviewed and may include details on settling the debt, such as contact information.

Debit Note Features

Debit notes may look different based on the issuer. However, every vendor that uses them includes a few distinct components in these documents. The following is a list of some of the features of a debit note:

• Date of issue
• Seller’s name and address
• Buyer’s name and address
• Name and description of goods or services
• Price per unit of goods or services
• Total cost of the order

These features ensure that the buyer and seller have a clear record of the transaction.

Debit Note vs. Credit Note

A debit note is different from a credit note. A debit note notifies a buyer of the debt they owe, while a credit note notifies a buyer of a credit being applied to their account. Debit notes increase the amount owed by the buyer, while credit notes reduce the buyer's liability.

Credit notes are issued in several situations, including:

• If there was an error in the invoice, such as a mistake in pricing
• When an order gets changed
• If goods were damaged before or during delivery
• If a customer rejects an order

Credit notes may be used to cover all or part of the bill's value. However, a credit note is not a refund. It indicates that the customer’s account has a credit on file, which can be used to offset the cost of future purchases.

The Bottom Line

Vendors and buyers commonly create and submit documents relating to the exchange of goods and services. A debit note is one document that both parties can send to one another.

A debit note indicates that a buyer has a payment pending on an order, or it can alert a vendor that a buyer is making an adjustment on something they ordered. However, don’t confuse this with an invoice, which is a bill of sale that has information about the nature of the goods sold, their price, and the total amount of the order.