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How does a business entity account for goods that the customer returns after purchasing them? An item can be returned for quality/quantity issues, packaging defects, or maybe because customers were overcharged and the tax invoice didn’t reflect their payment. It warrants accounting, both by the buyer and the supplier. The issuance of a credit note allows a supplier to account for this returned item in their ledger.
This article will explain credit note meaning, what is debit note and credit note, and the reason for issuing credit note.
Credit and debit notes are best understood with an example. Imagine heading to your local grocery store to buy some groceries worth ₹2000. When you get back home, you realise that the bread you bought is stale and the milk is spoilt. They together amount to ₹ 80. You immediately head back to the store, return them, and ask for a replacement. The shopkeeper obliges, only to regretfully inform you that his stock for both bread and milk is depleted.
Instead of returning you the ₹80, he issues you a credit note, telling you that you could come to his store and buy the bread and milk at any point in the future or make a purchase worth ₹ 80. This is the primary function of a credit note.
In a supplier and buyer transaction, the supplier issues a "credit note" as a sales return. By doing so, the supplier informs the buyer that the purchase returns are accepted. A credit note, also called a "sales return credit note", is given by the supplier in exchange for a debit note.
The customer returning the goods provides the debit note. In our example, you give a debit note to the shopkeeper mentioning the details of what you intended to purchase with the ₹80. In return, you receive a credit note from the shopkeeper.
A credit note enables a buyer to purchase goods later without paying for them. While quality issues can be one reason for issuing credit notes, here are a few more reasons why suppliers may issue them:
Hence, the process of issuing a credit note to a customer is as follows:
Section 34 of the Central Goods and Services (CGST) Act, 2017 mandates the issuance of one or more credit notes in any such event.
A credit note contains HSN SAC codes (Harmonized System Nomenclature Service Accounting Code) for the goods involved, the name of the product/service, quantity, rate, taxable value, the Integrated Goods and Services Tax (IGST), and a calculation of the total amount after tax. It also contains the buyer's bank details, who has already made the payment.
Additionally, it may also include:
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