Debit and Credit Notes are a part and parcel of daily transactions of any business.

In simple words, when there are Sales Returns or Purchase Returns in a business, debit and credit notes are used.

There is not a single a business who do not have any kind of need for a debit and credit notes.

Well, today you are going to learn to easily create debit and credit notes in Tally.

Why people are confused in Debit and Credit Notes

It is because they are actually quite confusing.

I was also confused when I learnt that in 11th standard but eventually got it.

So, before learning how to pass entries for debit and credit notes in Tally, let us first understand the concept behind the debit and credit note creation.

Concept of Debit & Credit Note

The need for debit note and credit note arises most of the time when there is a Return of Goods.

Usually when there is a return of goods, the person does not directly give the cash for the returned goods.

He issues Credit Note if he is a seller.

And the buyer issues a Debit Note for the same transaction to the seller from whom he has received credit note.

Yes, this is how it works.

Now, it may not sound confusing to you anymore. Right?

If it still sounds confusing, go ahead and read the example for utmost clarity.

Example of Credit and Debit Note

For a better understanding let us take a simple routine business transaction as an example. This is in simple terms is called sales returns entry in Tally or purchase returns entry in Tally.

Let’s say I SOLD goods worth ₹15,000 to Amit.

After checking the goods he did not liked the goods worth ₹5,000 and RETURNED to me.

Therefore in this case, I will not give him directly the cash because it will reduce overall sales.

Instead, I will give him credit worth ₹5,000 to him using which Amit can buy anything from me to the extent of Rs.5,000 without paying me anything in future.

The document that I will give him as a proof to buy anything up to ₹5,000 without paying a single rupee is in fact the Credit Note.

This is the real concept of a credit note. So what is a debit note? Well, it is exact opposite of a credit note.

Let us continue with this example to understand the concept of a debit note.

Debit Note

As I issued a Credit Note, at the same time Amit will issue Debit Note to me for the same transaction.

Amit has returned goods worth ₹5,000 to me and he will issue a debit note for that amount.

Therefore Amit will show debit balance (Debit = Assets) of me in his books.

This is because Amit has already paid for the goods, but has returned some of them.

On the other hand, I will show credit balance (Credit = Liabilities) of Amit in my books.

The reason for credit balance is because I have received the goods in return as well as money for that goods from Amit.

So, now I am liable to pay the money or goods to Amit.

This is the real crux behind debit and credit note.

Debit and Credit Notes in Tally

For using debit and credit notes in Tally, you would have enable them.

To enable the option for debit and credit notes in Tally, follow the steps below.

  • From Gateway of Tally, press F11 – Shortcut for Company Features
  • Now select, Accounting Features.
  • Under Invoicing, set the option Use debit/credit notes to YES.
  • Also set YES for:
    • Use invoice mode for credit notes
    • Use invoice mode for debit notes
Enabling Debit and Credit Notes in Tally

Enabling Debit and Credit Notes in Tally

Creating a Credit Note in Tally

Let’s take the example which I have explained in the video itself.

I have sold goods worth ₹15,000 to Amit.

But he doesn’t like certain goods and he is returning the goods to me worth ₹5,000.

For this, I won’t give the ₹5,000 back because I am a true businessman and therefore I will issue Credit Note to Amit.

Here is what I will do it Tally.

From Gateway of Tally, I will go to Accounting Vouchers.

Accounting-Vouchers-from-Gateway-of-Tally

After I am in the Accounting Vouchers, I will go and select Credit Note.

I can select Credit Note in 2 ways. Either by clicking on it or by shortcut which is CTRL+F8.

If you are already in the Credit Note voucher than it is okay but if you are not, you can go by just pressing CTRL+F8.

After you are in the credit note voucher, the screen in Tally would look something like this.

Credit Note in Tally

Now, I will pass the entry for Credit Note of ₹5,000.

I have already passed the Sales Entry in one of the posts.

You can go there and know how to create a sales and purchase entry both.

Here is what the Sales Entry looks like in Tally.

Sales Entry in Tally

Now, here is what the Credit Note entry in Tally for ₹5,000 looks like.

Credit Note entry in Tally

I would like you to pay attention to some of the important things about the entry.

Firstly, the Current Balance shows ₹15,000 by which we can take a decision on how much the credit note should be made.

In simple words, we can easily know that the credit note would not be made up of above ₹15,000 because that is what the total sales.

Secondly, I would look at the Narration which is in the bottom left corner of the the image.

You can write the narration so that next time you see the entry, you will be able to know for what reason the goods were returned.

When you are completed with the entry, just press Yes and the Credit Note entry will be created.

Let us have a look at the sales entry as well as the credit note entry together in Profit and Loss Account in Tally.

Sales and Credit Note Comparison in Tally

Sales and Credit Note Comparison in Tally

You can clearly see that Credit Note makes a debit amount and therefore reduces our sales.

This is because, Amit has returned the goods and therefore in reality the goods have not been sold so the sales has been reduced.

Now, let us look at this example from the point of view of Amit.

Which is why we are going to pass a Debit Note entry.

Creating a Debit Note in Tally

A credit note for me is a debit note for Amit as per this example.

I have created another company in Tally called Amit so I can show you the creation of a debit note.

Know how to create a company in Tally in 5 minutes, if you don’t know how to create a company.

Firstly, I have already created the Purchase Voucher of ₹15,000 in the Amit’s company.

Have a look at the purchase entry in the image below.

Purchase entry for Debit Note in Tally

Purchase entry for Debit Note in Tally

As you can see, it is a simple purchase entry and nothing more complicated.

Now, to create a Debit Note, here are the steps.

Go to Accounting Vouchers from Gateway of Tally.

Then select Debit Note from the left had bar or simply press CTRL+F9 which is the shortcut for Debit Note.

After entering the details in the Debit Note, here is what it will look like.

Debit Note in Tally

Debit Note in Tally

Here is what a Debit Note in Tally looks like.

It is almost similar to the Credit Note but it is from the point of view of a Purchaser.

Now let us have a look at the Purchase entry as well as the Debit Note entry together in Profit and Loss account.

Purchases and Debit Note Comparison

Purchases and Debit Note Comparison

You can clearly see the credit entry for Debit Note of ₹5,000 which nullifies the effect of ₹5,000 worth of the purchases.

It looks similar to the Credit Note.

Video of Debit and Credit Notes in Tally

At the end…

I have already explained entries for Purchases and Sales in one of the previous posts.

This is the continued post and the video of that post because after sales and purchases, sales and purchase returns happen.

And therefore, the need for Debit and Credit Note arises.

See the video now and you will understand easily how to create debit note and credit note entries in Tally.

I have explained the creation of Debit Note and Credit Note in Tally in the video.

Have you used debit and credit notes in Tally prior to watching this video?