Debit and Credit Memo

A Debit Memo or Debit Note is the transaction that reduces the Accounts Payable amount as you have returned some goods to you Vendor(s). It is issued by a buyer or Customer to a seller or Vendor. It acts as a source document for the Purchase Return Journal.

A Credit Memo, or Credit Note, is the transaction that reduces the Accounts Receivable, as your customer has returned some goods to you.It acts as a source document for the Sales Return Journal. A credit memo can be issued in different cases, for illustration, if the cash discount is not considered in the final invoice or of incorrect price is used in the invoice.A Credit memo can be assigned to an open invoice in SD

Example

Suppose there is a company with name “Seller Pvt. Ltd” and it sells products of worth 1000 INR to its customer with company name “Buyer Pvt. Ltd.”

  • In this case, Seller Pvt. Ltd. will issue a Sales Invoice of 1000INR to Buyer Pvt. Ltd.
    Dr.      Accounts Receivable: Buyer Pvt Ltd            1000 INR
    Cr.            Revenue from sales                                 1000 INR
  • After receiving the product the Buyer founds that one of the products shipped is damaged and informs Seller Pvt. Ltd. about it. Seller Pvt. Ltd. agrees and issues a credit memo or 100INR to Buyer Pvt. Ltd.
    Dr.        Sales Return                                                      100 INR
    Cr.       Accounts Receivable: Buyer Pvt Ltd      100 INR
    In other words, the Credit Memo reduces the net receivables and net sells of Seller Ptv. Ltd.
  • On receiving the Credit memo from Seller Pvt. Ltd., Buyer Pvt. Ltd. records a Debit memo in his accounting books.
    Dr.        Accounts Payable: Buyer Pvt Ltd            100 INR
    Cr.        Purchase Return                                   100 INR
    In other words, the Debit Memo reduces the net payable of Buyer Ptv. Ltd.