Debit and Credit Notes

 

Introduction

Debit and Credit Notes are a part and parcel of daily transactions of any business. In simple words, when there are Sales Returns or Purchase Returns in a business, debit and credit notes are used. There is not a single business that does not have any kind of debit and credit notes.

Concept of Debit & Credit Note

The need for debit note and credit note arises most of the time when there is a Return of Goods. Usually when there is a return of goods, the person does not directly give the cash for the returned goods. He issues Credit Note if he is a seller and the buyer issues a Debit Note for the same transaction to the seller from whom he has received credit note.


Example of Credit and Debit Note

For a better understanding let us take a simple routine business transaction as an example. This is in simple terms is called sales returns entry in Tally or purchase returns entry in Tally. I SOLD goods worth ₹15,000 to Jugal. After checking the goods he did not liked the goods worth ₹5,000 and RETURNED to me. Therefore in this case, I will not give him directly the cash because it will reduce overall sales. Instead, I will give him credit worth ₹5,000 to him using which Jugal can buy anything from me to the extent of ₹5,000 without paying me anything in future.

Note: The document that I will give him as a proof to buy anything up to ₹5,000 without paying a single rupee is in fact the Credit Note.

This is the real concept of a credit note. So what is a debit note? Well, it is exact opposite of a credit note. Let us continue with this example to understand the concept of a debit note. As I issued a Credit Note, at the same time Jugal will issue Debit Note to me for the same transaction. Jugal has returned goods worth ₹5,000 to me and he will issue a debit note for that amount. Therefore, Jugal will show debit balance of me in his books. This is because Jugal has already paid for the goods but has returned some of them. On the other hand, I will show credit balance of Jugal in my books. The reason for credit balance is because I have received the goods in return as well as money for that goods from Jugal. So, now I am liable to pay the money or goods to Jugal. This is the real crux behind debit and credit note.  

Debit and Credit Notes in Tally

For using debit and credit notes in Tally, you would have enable them. To enable the option for debit and credit notes in Tally, follow the steps below.

§  From Gateway of Tally, press F11 (Shortcut for Company Features)

§  Now select, Accounting Features or press F1.

§  Under Invoicing, set the option Use debit/credit notes to YES.

§  Also set YES for:

o  Use invoice mode for credit notes

   o  Use invoice mode for debit notes 


Creating a Credit Note in Tally

I have sold goods worth ₹15,000 to Jugal but he doesn’t like certain goods and he is returning the goods to me worth ₹5,000. For this, I won’t give the ₹5,000 back and I will issue Credit Note to Jugal. Here is what I will do it in Tally:

·       From Gateway of Tally, I will go to Accounting Vouchers.


·       After entering the Accounting Vouchers, I will go and select Credit Note. I can select Credit Note in 2 ways. Either by clicking on it or by shortcut which is CTRL+F8.

After you are in the credit note voucher, the screen in Tally would look something like this:


Note: If the supplier does not issue a credit note then what you have to do is cancel the Purchase Entry for which no credit note is issued. Do the next entry at the reduced amount of the next purchase.

Creating a Debit Note in Tally

A credit note for me is a debit note for Jugal as per this example. After clicking on the Debit NoteVoucher, the screen will be as:


You can also see the video regarding "Debit and Credit Notes"



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