Define Debit Note
A debit note, more popularly known as a debit memo, is an accounting tool that reduces the amount of money payable to a vendor--known as accounts payable--when damaged goods are sent back to the vendor. A debit note is commonly used to process complaints in business, and is written when a customer returns damaged, substandard or the wrong type of goods back to the manufacturer, or when a customer is charged an amount lower than actually collected.
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Bad Debts
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A debit note may be written when a company receives money from a source that was previously deemed uncollectible. When a portion of accounts receivable is written off as bad debt, it reduces the balance from accounts receivable; for example, if a company had accounts receivable of $100 and bad debts of $20, its net accounts receivable balance would be $80. In realizing payment from an invoice written off as bad debt, the debit note replaces the original invoice. In accounting, when the payment is made, the receipt is applied to the note and not the original invoice. Debit notes may be numbered or coded according to the invoices they replace, allowing the company to keep track of the percentage and source of recovered funds.
Bank Debit Notes
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Debit notes are sometimes issued by banks to customers. The customer receives the debit note along with the periodic bank statement, notifying the customer that the bank has charged for some activities and made deductions from the balance in the account. A debit note may inform the customer that the bank has charged for printing a new check book, for returned checks, or for other service and administrative charges throughout the period. For a customer, the effect of a debit note is similar to writing a check on the account---a reduction in balance.
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Template
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Companies usually have a standard template for issuing debit notes, usually divided into a header, body and footer. Along with customer name and any reference number, the document contains information pertaining to the issuance of the note, such as category and quantity of affected products, reason behind the issuance of the note and any billing documents generated at the time of the original transaction. The body of the note contains explanations of the exact amount owed after issuing the note and reference to any notes issued earlier. The note is also coded and dated for reference in future issues.
Action
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Debit notes are most commonly used by companies to transfer expenses, reallocate charges, correct assignments to different accounts and reallocate receipt of funds. These actions are necessary because an uncorrected entry affects two different accounts, and individual accounts would have overstated or understated balances. Issuing the debit note allocates or transfers funds accordingly, allowing associated accounts to have the right balances.
Customer Consideration
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Debit notes are used on both the credit side and debit side of a transaction. Prompt issuance of a debit note indicates that management is aware of oversights, whether on its part or from a business partner. If a company's customer is affected by an error originating within the company, issuing the debit note, as quickly as possible, ensures that the customer is not inconvenienced by the error.
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References
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