Companies issue debit and credit invoices as they conduct business with customers. The terms debit and credit hold different meanings for accounting transactions, banking transactions and invoices. When a business exchanges a credit invoice or a debit invoice, it needs to realize what these documents mean.
Sellers issue credit invoices for a variety of reasons. If a customer reports a problem with merchandise it purchased, the seller may issue a credit invoice. If the customer returns unused product, the seller may issue a credit invoice for the amount returned. If the customer is dissatisfied with a service provided, the seller may issue a credit invoice to the customer. A credit invoice reduces the amount of money the seller expects to receive from the customer. The seller reduces her accounts receivable for the amount of the credit invoice and increases sales returns and allowances. The buyer reduces his accounts payable for the amount of the credit invoice and reduces his inventory value.
Sellers issue debit invoices for a variety of reasons. If a customer misses the deadline for an early payment discount and deducts the discount anyway, the seller may issue a debit invoice for the discount amount. If the seller prepaid freight charges for the customer, the seller may issue a debit invoice for those freight charges. A debit invoice increases the amount of money the seller expects to receive from the customer. The seller increases her accounts receivable for the amount of the debit invoice and increases revenue. The buyer increases his accounts payable for the amount of the debit invoice and increases his expenses.
Credit and debit invoices provide a couple of advantages to both the buyer and the seller. First, credit and debit invoices provide a paper trail for the transaction. This documentation allows company employees and auditors to maintain records and review past transactions. Credit and debit invoices also create a record between the buyer and seller regarding the financial transactions between the two entities.
Some disadvantages arise from issuing credit and debit invoices also. Every credit or debit invoice issued creates additional expenses for the seller. The seller incurs paper costs, ink costs, postage costs and labor expenses associated with creating the invoices. Also, an abundance of credit and debit invoices creates the potential for confusion for both the buyer and seller as a result of the additional paperwork.
