Credit Notes & Debit Notes — Complete User Guide — Two Accounts Web

Comprehensive guide for managing credit notes (customer refunds) and debit notes (supplier returns), including LC return workflows, early payment discounts, and related reports

Table of Contents

1. What Are Credit Notes and Debit Notes?
2. Enabling the Tabs via Customize Menu
3. System Accounts & Setup
   • Chart of Accounts
   • Email Templates and Footers
   • Automatic Reference
4. Field-by-Field Guide — Credit Note
   • Header Fields
   • Line Fields
   • Credit Note Type
5. Field-by-Field Guide — Debit Note
   • Header Fields
   • Line Fields
6. Creating a Credit Note
   • Manual Creation
   • Copying from Sales Invoice
7. Creating a Debit Note
   • Manual Creation
   • Copying from Purchase Invoice
8. Early Payment Discount
9. LC Return Workflow — Debit Note Role
10. Accounting Impact
    • Credit Note GL Posting
    • Debit Note GL Posting
    • Inventory Impact
11. Opening Balances
12. Reports
    • Credit Notes / Debit Notes Listing
    • Customer Summary
    • Supplier Summary
    • Inventory Summary
    • Tax Reports
    • Cash Flow Statement
13. Sample Data and Report Output
    • Sample Data Setup
    • Credit Note Scenario
    • Debit Note Scenario
14. Accounting Regulation Compliance

1. What Are Credit Notes and Debit Notes?

Credit Notes are customer-facing documents that reduce the amount a customer owes. They are issued when:

• The customer returns goods
• A pricing error overstated the invoice amount
• A discount or allowance is granted after invoicing
• An early payment discount is applied

Debit Notes are supplier-facing documents that reduce the amount your business owes to a supplier. They are issued when:

• Goods are returned to the supplier (including through an LC)
• A pricing error understated the invoice amount (supplier-side correction)
• Damaged or defective goods are rejected
• Short delivery occurs

2. Enabling the Tabs via Customize Menu

To make Credit Notes and Debit Notes visible in the navigation bar:

1. Open the Customize Menu by clicking the customize button on the top-right of the navigation bar
2. Find "Credit Notes" and "Debit Notes" in the list of available tabs
3. Toggle each to Visible
4. Click Save or Apply

Once enabled, you will see:

• Credit Notes — main listing of all credit notes with date, customer, reference, and amount
• Debit Notes — main listing of all debit notes with date, supplier, reference, and amount
• Credit Note Footers (under Settings) — create reusable footer text for credit note documents
• Debit Note Footers (under Settings) — create reusable footer text for debit note documents
• Email Template for Credit Note (under Settings) — configure email template for sending credit notes
• Email Template for Debit Note (under Settings) — configure email template for sending debit notes
• Early Payment Discounts (under Credit Notes) — batch process early payment discounts for eligible sales invoices

3. System Accounts & Setup

3.1 Chart of Accounts

Credit and Debit Notes reuse existing system accounts — no special accounts are needed. The GL posting uses:

These accounts are configured in Settings > Chart of Accounts. The AR and AP accounts are singleton accounts that auto-create when the first transaction of their type is recorded.

3.2 Email Templates and Footers

• Settings > Credit Note Footers — create footer text that appears on credit note PDFs or printed documents. Each footer has a Name and Content field. Multiple footers can be assigned to a credit note.
• Settings > Debit Note Footers — same functionality for debit notes.
• Settings > Email Templates — configure the email subject and body templates for sending credit notes and debit notes to customers and suppliers respectively.

3.3 Automatic Reference

Both Credit Notes and Debit Notes support automatic reference numbering. When creating or editing:

1. Check the Automatic Reference checkbox next to the Reference field
2. The system generates the next sequential number in the format matching your existing references
3. When unchecked, the Reference field becomes editable for manual entry

4. Field-by-Field Guide — Credit Note

4.1 Header Fields

4.2 Line Fields

4.3 Credit Note Type

The Credit Note has an internal Type field with two values:

• Custom — a manually created credit note for any purpose (returns, adjustments, corrections)
• Early Payment Discount — automatically created by the system when processing early payment discounts

This field is hidden from the user interface. It is set automatically based on how the credit note is created. The type affects only the display — early payment discount credit notes show "Early Payment Discount" as their description in the view.

5. Field-by-Field Guide — Debit Note

5.1 Header Fields

5.2 Line Fields

6. Creating a Credit Note

6.1 Manual Creation

1. Go to Credit Notes > New Credit Note
2. Select the Customer — the Billing Address auto-populates
3. Optionally select the Sales Invoice being credited (filters to show only this customer's invoices)
4. Add lines:
   • Select an Item or enter an Account directly
   • Enter the Qty being returned
   • The Sales Unit Price defaults from the item; adjust if needed
   • Select a Tax Code if applicable
   • The system calculates the line total (Qty × Unit Price − Discount)
5. Set Amounts Include Tax if line amounts include tax
6. If the customer is foreign currency, verify the Exchange Rate
7. Enable Withholding Tax if applicable
8. Add an optional Description
9. Save

6.2 Copying from Sales Invoice

1. Go to Sales Invoices
2. Click the Copy to button on the invoice
3. Select Credit Note
4. The system creates a new Credit Note with all lines copied from the invoice
5. Adjust quantities and prices to reflect only the returned items
6. Save

7. Creating a Debit Note

7.1 Manual Creation

1. Go to Debit Notes > New Debit Note
2. Select the Supplier
3. Optionally select the Purchase Invoice being debited
4. Add lines (same process as Debit Note lines above)
5. Save

7.2 Copying from Purchase Invoice

1. Go to Purchase Invoices
2. Click the Copy to button
3. Select Debit Note
4. Adjust quantities and prices to reflect only the returned items
5. Save

8. Early Payment Discount

The system can automatically generate Credit Notes for early payment discounts offered on Sales Invoices.

Workflow

1. On a Sales Invoice, enable Early Payment Discount and set the discount type (% or amount) and the discount days
2. When the customer pays within the discount period, go to Credit Notes > Early Payment Discounts
3. The system shows all eligible invoices where the discount has not yet been applied
4. Select the eligible invoices and click the batch action button
5. The system automatically creates Credit Notes with:
   • Type = Early Payment Discount
   • Lines copied from the original invoice, prorated by discount ratio
   • Line discounts zeroed out and quantities set to null
6. The credit note reduces AR by the discount amount

When the Credit Note is created:
    Dr  Revenue / Income        (discount amount)
        Cr  Accounts Receivable          (discount amount)

This reduces both the income recognized and the amount owed.

9. LC Return Workflow — Debit Note Role

When goods imported via a Letter of Credit need to be returned, a Debit Note is used as one part of a three-step process. The full return workflow is documented in the LC User Workflow guide.

Why Three Steps Are Needed

An LC payment involves three parties, and each requires a separate reversal:

Step 1 — Debit Note (Return Goods to Supplier)

Create a Debit Note against the supplier for the CIF value only:

• Select the Supplier
• On the line, select the Item being returned
• Enter the Qty being returned
• Enter the Amount equal to the CIF value of the returned goods (not the full landed cost)
• Save

After this step:

• Accounts Payable is reduced by the CIF value
• Inventory is reduced by the CIF cost layer (remaining inventory holds duties and landed costs)
• The cost of goods sold is reversed

For the complete return process with full sample data, see the Import LC Return Workflow section in the LC User Workflow guide.

10. Accounting Impact

10.1 Credit Note GL Posting

When a Credit Note is saved, the system creates the following general ledger entries for each line:

For an inventory item return:
    Dr  Revenue / Income            (sales price × qty, reversing the sale)
    Dr  Tax Payable / Receivable    (tax amount, reversing output tax)
        Cr  Accounts Receivable                 (total line amount, reducing customer balance)

    Dr  Inventory (cost layer)      (cost of returned goods added back to stock)
        Cr  Cost of Goods Sold                   (COGS reversed)

For a non-inventory return (e.g., service credit):
    Dr  Revenue / Income            (credit amount)
        Cr  Accounts Receivable                 (credit amount)

If Withholding Tax is enabled:
    Dr  Withholding Tax Receivable
        Cr  Withholding Tax Payable

The system also creates a balancing entry to Accounts Receivable for the total of all lines. The Credit Note uses reverse sign -> false — line amounts entered as positive values create debit entries that reduce income.

10.2 Debit Note GL Posting

When a Debit Note is saved, the system creates the following GL entries for each line:

For an inventory item return to supplier:
    Dr  Accounts Payable            (total line amount, reducing supplier balance)
        Cr  Purchase / Inventory               (purchase price × qty, reversing purchase)
        Cr  Tax Payable / Receivable            (tax amount, reversing input tax)

For a non-inventory return:
    Dr  Accounts Payable            (credit amount)
        Cr  Expense / Asset                     (reversing the original expense)

For a fixed asset return:
    Dr  Accounts Payable
        Cr  Fixed Assets, at Cost

The system also creates a balancing entry to Accounts Payable. The Debit Note uses reverse sign -> true — amounts are treated as reducing supplier liabilities.

10.3 Inventory Impact

For inventory items, both Credit Notes and Debit Notes affect inventory valuation:

• Credit Note (customer return): The goods are added back to inventory at cost. The system reverses the Cost of Goods Sold entry and re-adds the cost layer to Inventory On Hand.
• Debit Note (supplier return): The goods are removed from inventory at cost. The system reduces Inventory On Hand and reverses the purchase entry.

Both are recorded as adjustments in the Inventory Value Summary report.

11. Opening Balances

There are no opening balance entries specifically for Credit Notes or Debit Notes. However, opening balances can affect the same accounts:

• Accounts Receivable opening balance: Go to Settings > Opening Balances, select an Accounts Receivable account, set the Debit/Credit and Amount. This establishes the opening AR balance from which Credit Notes will reduce.
• Accounts Payable opening balance: Same process for AP — select an Accounts Payable account, set the amount. Debit Notes will reduce this balance.

12. Reports

12.1 Credit Notes / Debit Notes Listing

The main listing pages show:

• Credit Notes: Issue Date, Reference, Customer, Sales Invoice (reference), Description, Amount
• Debit Notes: Issue Date, Reference, Supplier, Purchase Invoice (reference), Description, Amount

Clicking the Amount drills into the individual GL transactions for that note. Each listing page has a New Credit Note / New Debit Note button at the top.

12.2 Customer Summary

The Customer Summary report shows a Credit Notes column for each customer. This column appears automatically when credit notes exist for that customer during the report period. It summarizes the total value of credit notes issued to each customer.

12.3 Supplier Summary

The Supplier Summary report shows a Debit Notes column for each supplier. This column appears automatically when debit notes exist for that supplier during the report period.

12.4 Inventory Summary

Inventory Value Summary: Both Credit Notes and Debit Notes are classified as Adjustments to inventory value. They appear alongside Journal Entries and Inventory Write-Offs in the adjustments column.

Inventory Quantity Summary: This report has dedicated filter buttons for Credit Notes and Debit Notes. When enabled, these show the quantity movements from sales returns (Credit Notes) and purchase returns (Debit Notes) separately from regular Sales and Purchases.

12.5 Tax Reports

Credit Notes and Debit Notes with tax codes appear in applicable tax reports:

• Credit Notes appear in sales tax reports (e.g., Mushak 6.1 — Sales Invoice, which includes credit note adjustments)
• Debit Notes appear in purchase tax reports (e.g., Mushak 6.8 — Debit Note, for VAT-registered debit notes)

12.6 Cash Flow Statement

Credit Notes and Debit Notes themselves are non-cash transactions — they adjust AR/AP balances without moving cash. However:

• Direct Method: Credit Notes are excluded from operating activities (they are not cash receipts/payments). Debit Notes are also excluded.
• Indirect Method: The AR/AP adjustments from Credit/Debit Notes are reflected within the "Changes in Working Capital" section — the Accounts Receivable and Accounts Payable lines include the effects of credit and debit notes.

13. Sample Data and Report Output

13.1 Sample Data Setup

13.2 Credit Note Scenario

Event: ABC Retail Ltd returns 10 units of Widget-X (damaged). Credit Note CN-001 is issued.

GL Transactions Created

Line entry (Widget-X return):
    Dr  Revenue — Widget Sales         500.00   (reverses sale revenue)
    Dr  VAT Payable                     75.00   (reverses output tax)
        Cr  Accounts Receivable                   575.00   (reduces customer balance)

Inventory reversal:
    Dr  Inventory On Hand               300.00   (10 units × 30.00 cost, added back)
        Cr  Cost of Goods Sold                    300.00   (reverses COGS)

DR = CR: 500 + 75 + 300 = 575 + 300 = 875 ✓

Customer Summary Impact

Verification: 0 + 5,750 − 0 − 575 = 5,175 ✓

Inventory Quantity Summary Impact

13.3 Debit Note Scenario

Event: 5 units of Widget-X from supplier XYZ Trading Co are found defective. Debit Note DN-001 is issued.

GL Transactions Created

Line entry (Widget-X return to supplier):
    Dr  Accounts Payable                143.75   (reduces supplier balance)
        Cr  Inventory — Widget Purchases       125.00   (reverses purchase cost)
        Cr  VAT Receivable                        18.75   (reverses input tax)

Inventory reduction:
    Dr  Cost of Goods Sold               150.00   (5 units × 30.00 cost, removed from stock)
        Cr  Inventory On Hand                     150.00   (reduces inventory)

DR = CR: 143.75 + 150 = 125 + 18.75 + 150 = 293.75 ✓

Supplier Summary Impact

Verification: 0 + 5,750 − 0 − 143.75 = 5,606.25 ✓

Balance Sheet Impact

14. Accounting Regulation Compliance

14.1 IFRS 15 — Revenue from Contracts with Customers

Requirement (§55-56): Refunds and returns must be accounted for by reversing the revenue recognized. A refund liability and asset for the right to returned goods must be recognized.

How this system complies: Credit Notes reverse the original revenue recognition by debiting the income account. Inventory is increased by the cost of returned goods, reversing the original COGS entry. The net effect correctly reflects the reduction in revenue and the return of inventory to stock.

14.2 IAS 2 — Inventories

Requirement (§34-35): When goods are returned by a customer, they should be re-added to inventory at the lower of cost and net realizable value.

How this system complies: The system automatically reverses the cost layer when a Credit Note for an inventory item is processed. The returned goods are added back at their original cost (or at the manual COGS amount if overridden). For Debit Notes returning goods to a supplier, the cost is removed from inventory at the original purchase cost.

14.3 IAS 32 — Financial Instruments: Presentation

Requirement (§42): Financial assets and liabilities should be derecognized when the contractual rights expire or are settled.

How this system complies: Credit Notes reduce (settle) Accounts Receivable, and Debit Notes reduce (settle) Accounts Payable. The system posts directly to AR and AP, correctly derecognizing the portion of the receivable or payable being credited or debited.

14.4 IAS 21 — Foreign Currency

Requirement (§23): Foreign currency monetary items (AR, AP) are translated at the closing rate. The exchange rate at the transaction date determines the initial recognition.

How this system complies: Both Credit Notes and Debit Notes support foreign currency customers and suppliers. The exchange rate on the document determines the conversion rate for the reversal. The Customer's and Supplier's currency settings determine the transaction currency for GL posting.

14.5 VAT / Sales Tax Compliance

Credit Notes and Debit Notes with tax codes:

• Credit Notes reduce output VAT by reversing the original sales tax — the system creates a Dr to VAT Payable (reducing the tax liability)
• Debit Notes reduce input VAT by reversing the original purchase tax — the system creates a Cr to VAT Receivable (reducing the recoverable tax)
• Both appear in relevant tax reports (Mushak 6.1 for sales, Mushak 6.8 for purchases/debit notes) based on their tax codes

14.6 DR = CR Verification

Credit Note (CN-001: 10 Widget-X returned @ 50.00):
  Sales return entry:
    Dr  Revenue                         500.00
    Dr  VAT Payable                      75.00
        Cr  Accounts Receivable                    575.00
  Inventory return entry:
    Dr  Inventory On Hand                300.00
        Cr  Cost of Goods Sold                      300.00
  Total: 500 + 75 + 300 = 575 + 300 = 875 ✓

Debit Note (DN-001: 5 Widget-X returned @ 25.00):
  Purchase return entry:
    Dr  Accounts Payable                 143.75
        Cr  Inventory — Purchases                   125.00
        Cr  VAT Receivable                            18.75
  Inventory removal entry:
    Dr  Cost of Goods Sold               150.00
        Cr  Inventory On Hand                        150.00
  Total: 143.75 + 150 = 125 + 18.75 + 150 = 293.75 ✓

14.7 Relevant but Not Applicable

• IFRS 16 (Leases): Credit and Debit Notes relate to the sale/purchase of goods, not lease arrangements.
• IAS 16 (PP&E): Fixed assets can appear on Debit Note lines (for returning FA purchased via LC or invoice), but the accounting treatment for the return follows the same AR/AP reversal pattern described above.
• NBR VAT Act 2012 — Mushak 6.8: Debit Notes are specifically referenced in the Mushak 6.8 report as a supporting document for adjustments to purchase invoices.

End of Credit Notes & Debit Notes Guide