Debit Notes
This guide explains how to use Debit Notes to reduce the amount you owe to a vendor (supplier). Whether dealing with goods returns, overcharges, or refunds, Debit Notes ensure your Accounts Payable and expenses are accurate.
What is a Debit Note?
A Debit Note is a document that reduces the amount your business owes to a vendor. It is the opposite of a specific Vendor Bill—instead of owing money, you are claiming a reduction in your debt.
Common reasons to issue a Debit Note:
| Reason | Example |
|---|---|
| Vendor Returns | You return 5 damaged hard drives to the supplier |
| Overcharge Correction | Vendor billed $100/unit instead of negotiated $90 |
| Discount Claimed | Vendor granted a retroactive volume discount |
| Bill Cancellation | Duplicate bill being cancelled |
| Short Shipment | Invoiced for 10 items but only received 8 |
Accounting Impact: A posted Debit Note decreases your expenses/inventory value and reduces Accounts Payable (the amount you owe).
Where to Find It
Navigate to: Accounting → Adjustment Documents
When creating a new Adjustment Document, select Debit Note as the type.
[!TIP] Debit Notes share the same list as Credit Notes in the "Adjustment Documents" section. Use the filters or distinct badges (Warning/Orange color) to identify them.
Debit Note Workflow
Your debit note goes through these stages:
graph LR
Draft[📝 Draft] --> Posted[✅ Posted]
Posted --> Applied[💰 Applied/Refunded]
📝 Draft
- You can edit all details (vendor, products, amounts).
- No accounting entries generated yet.
✅ Posted
- Locked for editing.
- Journal entry created (Debit Accounts Payable, Credit Expense/Asset).
- Reduces the vendor's outstanding balance.
💰 Applied / Refunded
- The debit note has been used to pay off another open bill.
- Or the vendor has sent a cash refund.
Creating a Debit Note
Step 1: Start the Debit Note
- Go to Accounting → Adjustment Documents
- Click Create Adjustment Document
- Select Debit Note as the Type.
Step 2: Fill in the Header
| Field | What to Enter | Example |
|---|---|---|
| Type | Select "Debit Note" | Debit Note |
| Vendor | The supplier you are charging back | Tech Supplies Inc. |
| Currency | Same as original bill | USD |
| Date | Date of the return/correction | Today's date |
| Original Vendor Bill | Link to the bill being corrected (optional but recommended) | BILL-2024-889 |
| Reason | Why you're issuing this debit | "Return of 5 damaged units" |
Step 3: Add Line Items
Click Add Line Item (or copy from original bill if linked):
| Field | Description | Example |
|---|---|---|
| Product | Item being returned | Hard Drive 1TB |
| Description | Details | "Damaged in transit" |
| Quantity | Number of items | 5 |
| Unit Price | Cost per item | 80.00 |
| Account | Expense/Asset account (auto-filled) | Cost of Goods Sold / Inventory |
| Tax | Appropriate tax rate | 10% VAT |
[!NOTE] The system handles the "negative" logic automatically. You enter positive numbers, and the "Debit Note" type tells the system to reverse the accounting.
Step 4: Review and Post
Before clicking Post, verify:
- Correct Vendor is selected.
- Items and prices match the return/claim.
- Tax rates match the original bill.
Click Post to finalize.
Accounting Behind the Scenes
When you post a Debit Note for a $400 return (plus tax), the system records:
┌─────────────────────────────────────────────────────────────┐
│ Dr. Accounts Payable $440.00 │
│ Cr. Inventory / Expense $400.00 │
│ Cr. Input Tax (Participating) $40.00 │
1└─────────────────────────────────────────────────────────────┘
In plain English: We are reducing our debt to the vendor (Debit AP) and reversing the cost/asset we previously recorded (Credit Expense/Asset).
Applying a Debit Note
Once posted, you can "use" the debit note in two ways:
Option 1: Allocate to an Open Bill
If you owe this vendor for other bills (or the balance of the original bill):
- The Debit Note sits as a "negative debt" on the partner ledger.
- When paying the vendor, you can "match" the Debit Note against an open Bill to reduce the cash payment needed.
Option 2: Receive a Refund
If the vendor sends you money back (cash/bank transfer):
- Create a Payment (Inbound).
- Select the Vendor.
- Link the payment to this Debit Note.
Common Scenarios
Scenario 1: Returning Goods (RMA)
Situation: You bought 50 chairs. 2 arrived broken. Action: Create Debit Note for 2 chairs. Result: Your "Inventory" value drops by the cost of 2 chairs, and you owe the vendor less money.
Scenario 2: Pricing Error
Situation: Vendor invoiced $500 for a service that should be $400. Action: Create Debit Note for $100 (Difference). Result: Reduces expense by $100 and AP by $100.
Scenario 3: Bill Cancellation
Situation: You accidentally posted a duplicate vendor bill. Action: Create a Debit Note for the full amount of the duplicate bill. Result: The duplicate bill and debit note cancel each other out to zero.
Troubleshooting
"I can't see the Debit Note in Payments"
- Check if the Debit Note is Posted. Draft documents don't appear in payment matching.
- Verify the Currency matches the payment/bill currency.
"Tax amount is wrong"
- Ensure you selected the exact same tax rate used on the original Vendor Bill. Differences in tax configuration (e.g., included vs excluded) can cause mismatches.