In accounting, there are various accounts such as account payables, account receivables, cash, etc. In some of these accounts, the value of a company comes in (asset account) and in some of these accounts the value of the company goes out (liability account). Finally, all the balances from the assets and liabilities go onto the balance sheet equation.
Each of these smaller asset or liability accounts is accounted using a double accounting method and T shaped account with ‘Debit’ and ‘Credit’. If it is an account where firm value comes in (such as Account Receivables), then Debit is done for an increase and Credit is done for a decrease. If it is an account where firm value goes out (such as Account Payables), then Debit is done for a decrease and Credit is done for an increase.
If a Buyer bought goods worth $4000 then the buyer has to make couple of journal entries to balance his books. The buyer would credit his Account Payables (value going out account) and debit his Purchases (value coming in account).
On the other hand, the seller would debit is account receivables (value coming in account) and credit his sales (value going out account).
So, ideally the account payables should always have a credit balance and account receivables should always have a debit balance. However, if you’ve paid more money to your buyer than the goods that you have taken from him, then the buyer would see a debit balance in account receivables. This means that the buyer’s money is actually sitting on seller side and he needs to take equivalent money or stock from the seller.
In what situation would a buyer have to give a debit note to the seller/supplier?
When the seller gives an invoice to the buyer, and the buyer for whatever reason cannot fulfill the payment of that invoice for reasons on the buyer side, then the buyer would have to raise a debit note and then the supplier or seller would acknowledge the business reason by raising a credit note. When the buyer is raising a debit note, he is indicating that he is debiting the account payables account and therefore the credit balance in account payables will go down. Similarly, when the seller or supplier is providing a credit note, he is indicating that he is crediting the account receivables and therefore the debit balance (amount to be received) will be reduced.
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