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Credit note invoice format for Accounting and Tax

welcome to counts in this lesson we're going to be looking at the differences between a debit note and a credit note it's very important to appreciate the differences because it has implications for your books and ultimately your financial statements these documents are very important especially when you're dealing with the revenue Authority but like I said it also affects what you put down in your books now remember when you receive an invoice or when you write out an invoice to a client and you realize that there's a mistake or you need to make amendments you cannot simply throw that invoice or say let's just assume that invoice is not created or let's just cancel it you can't do that an invoice is legally binding and for that reason we need to create what is called a credit note to sort of offset or to cancel the invoice and remember you're not getting rid of the initial invoice a credit note is what will sort of reverse that initial invoice and we'll explain just now what a credit note is but firstly what is a debit note well a debit note is a document issued by a buyer to the seller as a way of requesting for a credit note a debit note is issued by the buyer before a credit note can be issued by the seller so a few things to note here if you didn't know what a debit note is well the first thing you have to note is that this is issued by the buyer the one who is buying a product or buying Services all right you would issue it as a buyer and you are issuing it to the seller as a way of requesting for a credit note now a credit note is a very important document so if you're requesting for a credit note you would issue a debit note and the one who sold to you would then issue you with a credit note so a debit note is issued to the seller before the seller can issue you with a credit note so you requesting for a credit note by issuing the de debit note to the seller I hope it's making sense it will make much more sense when we understand what a credit note is so a debit note is to say I have received an invoice from the seller and for some reason you deem that invoice not to be correct or it's incorrect for whatever reason and we look at the common reasons as to why we will request a credit note and then the seller would issue you the credit note and remember after he issues you the credit note that is when they will issue you with another invoice or a correct invoice if you will and now what is a credit note well a credit note is a document issued by a seller as we've just explained informing the buyer of a credit being applied to the buyer's account it is usually raised in response to a debit note from a buyer as we have just mentioned so a credit note is issued by the seller now remember a seller would have initially issued an invoice and then the buyer would see that there are some issues with that invoice and then will'll issue the seller back with the debit note and then the seller would issue a credit note in response to that debit note so obviously the seller issuing a credit note is acknowledging what the buyer has mentioned in the debit note and what does it mean that a credit is being applied to the buyer's account well when a seller issues an invoice to the buyer and the buyer now issues a debit note well by the seller creating the credit note is to say that the buyer does not owe the amount as initially put in the first invoice all right so you are saying that you are crediting it meaning that you are reducing the amount that the buyer owes you all right based on the debit note so once the seller issues the credit note then they can issue another invoice with the correct detail depending on what the case is as to why the debit note was issued all right what are those reasons that would cause a debit notee to be created by the buyer and for the seller to eventually issue a credit note well here they are a debit note is issued by the buyer because they received incorrect goods and that would be detailed in the initial invoice all right you may see incorrect Goods there let's say the buyer ordered some tables and then the seller dispatches chairs instead of tables and the seller would issue the invoice to the buyer and the buyer looks at it and sees chairs there instead of tables well that is when the buyer would issue a debit note to say listen this is not what I ordered please make the necessary adjustments and that is when the seller would issue back the buyer with a credit note showing that okay I've reversed what you owe us and this is exactly what is detailed in the credit note after that that is when the seller would be able to issue with a new invoice with the details that are correct another reason a debit note is issued by the buyer is if the goods are damaged so let's stick with the example of tables the buyer has ordered tables and has received the invoice from the seller and when the tables arrive the buyer notices that some of the tables or all the tables are actually broken that is when the buyer would create a debit note and issue it to the seller let's say five of the tables are broken and each table costs 50 Rand well the buyer would detail that in the debit not to say five tables broken times 50 Rand and the amount there is 250 R so the buyer is telling the seller to give a credit for 250 R because five tables are broken right that is another reason another one is a cancellation of an order once the seller issues an invoice to the buyer and the buyer decides to exercise his right of cancelling the order well if the seller agrees that indeed the buyer can still cancel the order then the seller would issue a credit note to the buyer so you can see here you cannot simply tell the buyer hey just know that invoice then because it's a legal document so you need to issue a credit note to that effect all right another one is pricing mistakes if the seller has charged the wrong price to the buyer on the invoice then the buyer would create a debit notee to say listen here's a problem here's the mistake that was made or for other reasons all right so the buyer might have other reasons as to why the debit note is issued to the seller all right and obviously the seller will have to a that and send a credit note that is precisely why a debit note is created by the buyer and the seller will receive the debit notee and create a credit note which he will issue back to the buyer then that will be one of the supporting documents that the buyer will need to keep in their books all right because if you have a credit note then you will need to detail it will affect your statements as well at debit note laws the sellers accounts receiv abl whereas a credit note lowers the buyer's account payable all right so once a debit note is created by the buyer and it's send to the seller once the seller receives the debit note then obviously if the seller agrees to the details in the debit note and is issuing a credit note then it will lower the seller's account receivables because when the seller issues an invoice if the buyer is not paid as of yet then the seller will record accounts receivable because it's yet to receive this money money but once a debit note is received then it will lower that accounts receivable because the buyer will not owe the money depending on what the reason is for the issuing of the debit note and the credit note lowers the buyer's accounts payable so remember when a buyer receives an invoice then that will increase how much he has to pay or how much he owes others which is Accounts Payable but if they issued with the credit note then that will reduce how much the buyer owes the seller obviously depending on what the reasons are a debit not remember can be issued for incorrect Goods so the seller might issue a credit note at the same time issuing another invoice with the correct details or correcting what may have not been correct in the initial invoice and that is the importance of a debit note and a credit note a debit note is recorded in the purchase returns journal and obviously that is by the buyer it's reported by the buyer remember purchase returns we purchased but now we are returning so when we are issuing a debit note obviously we'll record it in the purchase returns journal to say hey we are returning Goods here or the service here and a credit note when the seller is issuing a credit note it will reduce the sales because the seller would have recorded the sale all right by selling to the buyer but now that is issuing a credit note that is reducing the sales so that's in the sales returns Journal that's where it will be recorded So when you see a debit note look at who is returning so if you're looking at it from the perspective of your company if the name of your company is on top of the debit note then you know that you are the one who is issuing a debit note to to the person who sold to you all right so that means you would record it in the purchase returns journal what the amount of the debit note is and if you see a credit note if it's you who is issuing the credit note obviously that will reduce the sales so that means you would record it in the sales returns Journal but if you receive a debit note from someone else that means someone wants you to make changes to their invoice all right for whatever the reason and it will be detailed in the debit note that means you need to issue a credit I hope it has made sense here now do entities still issue these documents how do they work in practice well yes they still do like I have mentioned who issues a debit note and who issues a credit note and now a credit note is an extremely important document but what usually happens in practice is that not all entities will issue debit notes so you will not see a debit note in circulation as much you will find that when a company needs to get a credit note from their supplier for whatever reason they'll just make a phone call to the supplier and say listen can I have a credit note because of this and that or they will send an email to the supplier to send them a credit note and then a credit note will be sent so it's not the usual practice of many entities but there are entities which still make use of the debit note so that's just something to bear in mind so let's go through a short example and see how a debit note actually works here we have a buyer and a seller so let's say count is the buyer it wants to buy from the seller and the seller in this case being Mazda so let's say we as counters we would like to buy a Mazda 2 all right so we order a Mazda two from Mazda who is the seller and by ordering the Mazda to we receive an invoice from Mazda for a master 3 so you can see here there's a problem they issued us an invoice for a master 3 instead of a master 2 which we ordered as the buyer so what will we do in this case since we have received the invoice we can take that invoice and throw it in the dust bin and then ask for another invoice that's a legal document we need to ask the seller to send us a credit note and how do we ask a seller to send us the credit note well we will send a debit note to Mazda who is our seller right to say Hey listen you gave us a wrong invoice you give us an invoice for a master 3 remember it's for incorrect Goods instead of a master two so we detail that in the debit note and the seller in this case being Mazda would then send us a credit note so we receive a credit note from Mazda for the Mazda 3 all right the credit notes will be there and we'll have the same details that was on the initial invoice detailing what the uh what the credit is for it's for the Mazda 3 and once we've received the credit not the seller will then send as a correct invoice for a master two as we have ordered it all right I hope this example has made it much clearer and it has made it make more sense as to what the debit note is for and who issues it what the credit note is for in who issues the credit note and what are the possible reasons as to why a debit note and a credit note is issued if it has made sense if you have gained value from this lesson consider subscribing to our Channel like this video and share it to those who think it might help till next time cheers [Music]