What is a Debit Note? Meaning, Benefits and Template

A debit note is a critical financial document widely used in Malaysia to address adjustments in business transactions, such as correcting invoice errors, managing product returns, or reconciling pricing discrepancies. It serves as a formal notification from the buyer to the seller, indicating a reduction in the amount owed due to specific issues like defective goods or billing inaccuracies. 

With Malaysia's e-invoicing mandate, debit notes have now evolved into digital formats that must comply with specific technical requirements set by the Inland Revenue Board of Malaysia (IRBM). 

This blog provides comprehensive insights into debit notes in Malaysia, including their format, an editable template, key advantages, how they function under the e-invoicing system, differences from credit notes, their purpose, and practical examples.

What is Debit Note in Malaysia?

A debit note is a formal financial document issued to notify parties of debt obligations or adjustments to original invoices. In the Malaysian business context, debit notes serve as essential tools for maintaining accurate financial records and ensuring transparency in business-to-business (B2B) transactions. They function as preliminary documentation before an official invoice is sent and help address discrepancies like overcharging or returned goods.

Unlike invoices that require immediate payment, debit notes often come formatted as letters to inform buyers of upcoming debt obligations or account adjustments, especially in credit transactions. They play a crucial role in Malaysia's financial ecosystem by providing a documented trail of transaction adjustments that helps businesses maintain compliance with taxation requirements.

When to Issue a Debit Note?

They can be issued for several reasons including 

1. Product Returns and Defects: When a customer receives defective goods, they may issue a debit note to adjust the amount payable. For example, if a company purchases chairs worth RM50,000 and finds that chairs valued at RM10,000 are defective, they can issue a debit note to reduce their payment obligation by RM10,000.
2. Correction of Product Quantities: Debit notes are crucial when there are discrepancies in the quantity of products received compared to what was agreed upon. If a buyer receives fewer items than expected, a debit note can adjust the billing accordingly.
3. Freight Cost Adjustments: When handling freight charges, debit notes can address billing inaccuracies. If freight costs are overbilled or need reallocation, a debit note ensures the adjustment is appropriately reflected.
4. Changes in Taxable Supply Value: In cases where there is a change in the consideration for a taxable supply, debit notes become necessary to adjust the original transaction value and tax amount.

Examples of Debit Note

Example 1 - Returns by a customer -
PQR purchased chairs worth 50,000 from a seller ABC. After receiving it, PQR found that 5 chairs valued at 10,000 were defective. PQR is not required to pay 10,000 to ABC for those defective chairs. PQR will have to reduce the liability standing in his books as payment due to creditor ABC. Therefore, PQR issued a debit note of 10,000 to ABC and reduced the account of ABC in his books by 10,000.

Example 2 - Difference in the price charged by the seller -
ABC owns a mobile company and supplies 101 mobile phones to its customer XYZ. It was later identified that the invoice was issued to XYZ for only 100 mobile pieces. ABC can now use the debit note to recover the amount for the balance of 1 mobile piece.

How do debit notes relate to Malaysia's e-invoicing system?

Under Malaysia's e-invoicing mandate, debit notes are one of the four primary transaction documents that must be submitted electronically, alongside invoices, credit notes, and refund notes. The Inland Revenue Board of Malaysia (IRBM) recognizes debit notes as official e-documents that must comply with specific technical requirements.

A debit note within Malaysia's e-invoicing system is officially defined as "a document issued to indicate additional charges on a previously issued e-Invoice". This formalization within the e-invoicing framework ensures consistency in how businesses handle transaction adjustments.

Advantages of Using Debit Notes in Malaysia

Debit notes are vital documents in business ecosystem, offering numerous benefits that enhance financial transparency, compliance, and operational efficiency. 

1. Legal and Tax Compliance: Debit notes provide formal documentation for transaction adjustments, ensuring adherence to tax regulations and audit readiness.
2. Improved Financial Accuracy: They help maintain error-free financial records by rectifying discrepancies in invoices, quantities, or pricing.
3. Efficient Dispute Resolution: Debit notes simplify resolving disputes over defective goods, overcharges, or incorrect deliveries.
4. Cost Savings with E-Invoicing: Integration into Malaysia's e-invoicing system reduces costs, automates processes, and ensures compliance with IRBM requirements.
5. Transparency and Trust: They enhance transparency in business transactions, fostering trust between buyers and sellers while preventing fraud.

Debit note vs credit note

While debit notes increase the value of an invoice, a credit note reduces the value of an invoice. Similarly, in case of purchase returns, to cancel the invoice, the seller may issue a credit note or the buyer may issue a debit note. Here are the major differences

Debit Note Template

Some of the key inclusions in a debit note are -

• Name, address, contact details, and Tax Identification Number (TIN) of the supplier.
• Unique number of debit notes.
• Date of issue of debit note.
• Name, address, contact details, and TIN of the recipient.
• Invoice reference number and date against which debit note is issued.
• Details of the goods or services such as quantity, per unit amount, total amount excluding tax.
• Rate of tax and tax Amount.
• Signature.

Accounting Treatment of Debit Notes

‘When a debit note is issued, it reflects adjustments to previous transactions, typically involving the return of goods or correction of invoice amounts. The accounting treatment varies depending on whether the entity issuing the debit note is the buyer or the seller.

In the Buyer’s Books

When goods are returned to the supplier, the buyer reduces their liability by debiting the supplier's account and credits the purchase return account. This adjustment reflects the reduction in stock and liability.

Example journal entry:

• Debit: Supplier Account (to reduce liability)
• Credit: Purchase Return Account (to record returned goods)

For instance, if goods worth RM5,000 are returned:

• Supplier Account Debit: RM5,000
• Purchase Return Account Credit: RM5,000.

In the Seller’s Books

Upon receiving a debit note from a buyer, the seller records it as a sales return. The seller debits the sales return account and credits the customer's account to reflect reduced receivables.

Example journal entry:

• Debit: Sales Return Account (to record returned goods)
• Credit: Customer Account (to reduce receivables)

For example, if goods worth RM5,000 are returned:

• Sales Return Account Debit: RM5,000
• Customer Account Credit: RM5,000.

Conclusion

Debit notes are essential financial instruments in Malaysia, used to adjust business transactions, correct errors, and manage product returns. They ensure transparency, compliance with tax regulations, and accurate financial records. With the introduction of Malaysia's e-invoicing mandate, debit notes have transitioned into digital formats that streamline processes, enhance operational efficiency, and integrate seamlessly into tax reporting systems.