Factoring Companies Guidebook
Debit Notes
Definition
Any deduction made by a customer for items such as returned goods prior to the issuance of a credit note by the Client or another, equivalent to an invoice, raised on the sales ledger by the Client to cover items such as short payments.
Concerns
The issues of a debit note by a customer has the same effect as a credit note in eroding our security and indicates non-payment of invoices against which funds are likely to have been advanced. In some cases, a customer will raise a debit note as a temporary measure and then later repay it without a credit note being issued.
N.B. It is common for Debit Notes to be posted back onto the Clients sales ledger in the current column, resulting in an inflated sales ledger balance hence additional funding. Such items may need to be reserved for in full, depending on the reason they have been raised.
It is not uncommon for there to be substantial delays in the return of goods to the Client after the deduction of the debit notes, thus delaying the Client's ability to authenticate the deduction and issue a credit note. It also cannot be relied upon that the debit note relates to goods supplied by the Client.
Debit notes can be indicators of product quality problems, or internal administrative problems at the Client.
On Factoring and CHOCS ledgers the debit notes should be easily identifiable but on an ID ledger we would be reliant upon the Client to advise of any such deductions. Where summary aged debt ledgers are presented it is impossible to ascertain whether debit balances are invoices (fundable) or debit notes (non-fundable).
Identification
Debit notes tend to be prevalent with those customers who operate Self-Billing arrangements. Review customer remittance advises for deductions, self- billing invoices, credit notes to cover debit notes taken by the customer, open item ledgers and customer statements of account.
Treatment
All debit notes should be approved in full as soon as they are issued and identified. A copy of the debit note should be obtained from the debtor where the monetary amount is considered to be significant. A reserve can be put in place to protect our margin of security.
