Lock Stock and Barrel – of Debit and Credit Notes with Tax Invoices under GST

Lock Stock and Barrel – of Debit and Credit Notes with Tax Invoices under GST

Parable of Not a Penny More and Not a Penny Less

In this article, an attempt has been made to correlate two popular maxims – “lock stock and barrel” meaning “entirely, from top to bottom” with that of “ Not A Penny More and Not A Penny Less” in the context of Debit and Credit Notes with Tax Invoices under the provisions of GST Act, 2017

Origin of Debit and Credit Note

Debit Notes

A ‘debit note’ or ‘debit memorandum’ (memo) is a commercial document issued by a buyer to a seller as a means of formally requesting a credit note. Debit note acts as the Source document to the Purchase returns journal. In other words, it acts as evidence for the occurrence of a reduction in expenses. The seller might also issue a Debit Note instead of an invoice in order to adjust upwards the amount of an invoice already issued (particularly if the invoice is recorded at an incorrect value). Debit Notes are generally used in business-to-business transactions. Such transactions often involve an extension of credit, meaning that a vendor would send a shipment of goods to a company before the goods have been paid for. Although real goods are changing hands, until an actual invoice is issued, real money is not. Rather, debits and credits are being logged in an accounting system to keep track of inventories shipped and payments.

When a price is included on a debit note, it is the price that the customer was actually charged for those goods. (The price after the deduction of trade discount) (Source: Wikipedia)

Credit Notes

A credit note or credit memo is a commercial document issued by a seller to a buyer. Credit notes act as a source document for the sales return journal. In other words, the credit note acts as evidence of the reduction in sales. A credit memo, a contraction of the term “credit memorandum”, is evidence of a reduction in the amount that a buyer owes a seller under the terms of an earlier invoice.

It can also be a document from a bank to a depositor to indicate that the depositor’s balance is being adjusted in respect of an event other than a deposit, such as the collection by the bank of the depositor’s note receivable.

A credit note lists the products, quantities, and agreed prices for products or services the seller has provided to the buyer, but the buyer has returned in whole or part or did not receive it in the first place. It may also be issued in the case of damaged goods, errors, or allowances. In respect of the previously issued invoice, a Credit Memo will reduce or eliminate the amount the buyer has to pay. Note: A Credit Memo is not to be substituted as a formal document. The Credit Memo rarely contains PO #, Date, Billing Address, Shipping Address, Terms of Payment, List of products with quantities and prices. Usually, it references the original Invoice and sometimes states the reason for issue.

The words debit and credit can sometimes be confusing because they depend on the point of view from which a transaction is observed. (Source: Wikipedia)

The objective of Introducing Debit and Credit Notes in Accounting

As I understand, the origins of introducing Debit and Credit Notes in accounting systems germinated out of two legal precedents viz. Law of Undue Enrichment and Law of Restitution.

Law of Undue Enrichment

Meaning of “Unjust”:

Unjust can be termed as something which is not in accordance with the accepted standards of fairness or justice and which is also unfair.

Meaning of “Enrichment”:

When a person gains something from another, then it is said that the person is enriched. This enrichment can be both just and unjust.

Meaning of “unjust enrichment”:

When a person wrongfully uses other’s property at the expense of others, then it is called “unjust enrichment”.

According to Encyclopaedic Law Dictionary:

“Unjust enrichment is where a person unjustly obtains a benefit at the expense of another. In certain cases where the money is obtained by mistake or through fraud or for a consideration which has wholly failed, the law implies a promise to repay it.

According to Black’s Law Dictionary:

“Unjust enrichment is the:

a) The retention of a benefit conferred by another, without offering compensation, in circumstances where compensation is reasonably expected.

b) A benefit obtained from another, not intended as a gift and not legally justifiable for which the beneficiary must make restitution or recompense.

c) The area of law dealing with unjustifiable benefits of this kind.

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