Credit Note | Definition | Characteristics


hello everyone hi welcome to the channel
of WallStreetmojo watch the video till the end also if you are new to this
channel then you can subscribe us by clicking the bell ican friends day we’re
going to learn a concept which is known as the credit note now as you can see
there’s a dialogue box over here which states something that you know when the
purchaser sends the debit note the seller approves it and then sends back a
credit note stating that in the books of the seller the purchaser will be
credited I hope you must not have got a clear idea what exactly is going on but
we’ll try and understand now first let’s understand what exactly is the credit
note now when the purchase send the purchaser when he sends the debit note what
does he sends the debit note the seller basically approves it and then sends it
back to the sends it back a credit note stating in the books of the seller the
purchaser was credited now even if it is issued just to respond to the purchasers
debit note it isn’t actually a good thing to happen to a seller because you
know a credit note is basically an indication that the amount of the sales
will be reduced right but why the seller issues and my question is why the seller
issues this even if he knows that it will reduce the amount of sales okay
let’s have a look at that why is credit note issue why is credit
note issued see basically a business cannot exist or cannot say it cannot
exist in our in a vacuum so a business needs to thrive and without the
reputation in the good will it will not be able to perpetuate for a very long
time so issuing a note is basically you can say a gesture of goodwill which is
shown by the seller to the purchaser right seller to the purchaser
I’m just indicating in letters an offering a credit memo stating that the
amount of the goods are defective or erroneous and will be taken back and for
the returned amount the purchaser can avail something from the seller
so the gesture makes the relationship between the buyer that is the purchaser
and the seller rock-solid and as a result both of this company will thrive
let’s do some accounting portion of this so that you may have a really good idea
about this accounting of the credit note let’s try and understand this let’s say
there’s a company called MNC MNC company has bought a good let’s say worth of
$40,000 right from let’s say S&S traders an MNC company over here finds out that 2% of the stock is effective right of the total goods so
the defective in terms of amount is going to be 800 right now MNC
company basically would issue a debit note stating the same now what would be
the journal entry in the S&S traders books of account see to S&S traders
$40,000 worth of goods was sold now it was reverse so the journal entry
should be something like this sales account debit that would be closely to
800 over here to reversing MNC company account that would
be credited right to the extent of 800 now again one can argue that the
sales wouldn’t be debited but to create the effect in the ledger will debit
these sales account see here’s the full version that I’ll show you of the
journal entry before and after the issuance of this note it will go
something like this MNC
company account debit to the extent of 40,000 to the sales account that will be
40,000 right and the next entry is going to be the reversal but the sales account
debit to the extent of 800 to MNC company account right the extent of 800
and there will be one more entry that’s will be for the sales return account
debit sales return account debit that would be closely to 800 again to the
sales account this is very necessary to make your ledger appear proper now after
understanding the example let’s get into the traits or the characteristics of the
credit note see there are a few important features we need to know and
here are some ones like you know the credit note is issued by the seller see
when the buyer issues the debit or the seller responds by issuing this note
which states that the seller would credit the buyers account right the
buyers account so that the buyer needs to pay less or can avail other goods for
the same amount paid second the credit note it isn’t
a good sign for the seller it isn’t a good sign for the seller isn’t a good
sign for the seller and seller because by issuing credit note this seller
basically has to reduce the amount of the sales right they have charged from
the buyer right third the red ink is used now since the
amount is reduced from the sales it is perceived as a negative amount right and
that’s why the red ink is used forth the credit note is or the
credit note can be issued by the buyer as well now in one condition the buyer
issues the credit note for the seller right when the seller under charges the
buyer the buyer issues a credit note from for the seller fifth the sales
returned book is changed now as it is issued in certain cases the sales
written book is changed if the amount of the sales is reduced because of some of
the defective goods right I hope you have got a clear idea we just
understood what is exactly the credit note why the credit note has issued a
gesture of goodwill then we understood within your help of an example of MNC
and S&S traders where we had a details of sales to MNC in the by reversing the
data this is 800 we reversed the entry this is how actually it the whole
transaction took place MNC to sales that was the initial case then sales to MNC
will be reduced to the extent of 800 and to give a proper ledger effect readed
sales return to sales sales returned it in account is debited and sales has been
credited to that extent and finally we understood the fight
rates and which were more than enough to cover up the whole credit note concept
so that’s it for this particular topic if you have learned and enjoyed watching
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