One incorrect adjustment note can distort your VAT return and delay payments. In Saudi Arabia, VAT applies at 15% on most taxable supplies, and invoice adjustments must comply with ZATCA’s e-invoicing rules.
Using a debit note instead of a credit note, or vice versa, directly impacts input and output tax reporting. This guide clearly explains their differences, accounting treatment, VAT implications in KSA, and best practices to manage adjustments accurately and stay compliant.
A debit note is a commercial document issued to formally notify the supplier that the payable amount needs adjustment. It usually increases the amount due or records a purchase return.
It is not a fresh sale. It is an adjustment to an existing invoice.
Unlike casual emails or phone calls, debit notes create an official audit trail that both parties' accounting systems recognize and process.
The buyer always issues it to their supplier or vendor, creating a financial adjustment that increases the seller's obligation to the buyer or decreases what the buyer must pay.
Before moving forward, let’s clear up one of the most common points of confusion in accounting.
No, a debit note and an invoice serve different roles in the transaction cycle. An invoice initiates a sale and establishes the amount payable. A debit note, on the other hand, is issued later to adjust that original amount due to returns, shortages, or billing errors.
To understand the distinction clearly, here is a direct comparison:
Debit Note Example:
A trading company in Riyadh purchases 500 units of electrical fittings. The supplier invoices SAR 50,000 plus 15% VAT. Upon delivery, 50 units are damaged.
Action Taken:
The buyer issues a debit note for 50 units.
Adjustment Calculation:
Once you understand what a debit note does, the next step is knowing what information it must contain to remain valid and audit-ready.
A debit note is a formal accounting document that must clearly reference the original invoice and specify the financial adjustment. Missing details can create reconciliation issues and VAT reporting errors.
Below are the essential elements every debit note should include:
This section establishes reference and control.
Both entities must be clearly identified.
The purpose must be clearly stated and specific. Examples:
The reason should align with the financial adjustment recorded.
Be specific. Generic terms like “adjustment” without item detail can cause disputes.
If VAT applies, the debit note must clearly state the taxable amount, applicable VAT rate (such as 15% in KSA), VAT amount, and the total adjustment value, including tax. This ensures accurate correction of input or output VAT in financial records and prevents errors during VAT filing.
Knowing what goes into a debit note is half the battle. Let's see exactly when you need one and how the process actually works between buyer and seller.
Debit notes aren't issued randomly. They appear in specific business situations where the original invoice needs adjustment, and there's a structured process both parties follow to resolve the discrepancy.
Here are 5 common scenarios requiring debit notes:
Once a discrepancy is identified, the adjustment must follow a structured accounting flow.
Here's exactly what happens from issue identification to final accounting adjustment.
Now that the debit note process is clear, the other side of the adjustment needs equal attention.
A credit note is a formal document issued by a seller to reduce the amount a buyer owes under a previously issued invoice. It adjusts revenue and VAT without cancelling the original transaction.
It is commonly issued when goods are returned, overbilling occurs, or post-sale discounts are granted. The seller always issues it to their customer or buyer, creating a financial adjustment that reduces what the buyer owes or establishes a credit balance in the buyer's favor.
Although credit notes adjust financial records, they do not automatically mean money is returned.
No. A credit note is not the same as a refund.
A credit note reduces the outstanding payable or creates a credit balance in the buyer’s account. A refund involves actual payment back to the customer.
Credit Note Example
An electronics retailer purchases 200 units at SAR 300 each. Total invoice: SAR 60,000 plus 15% VAT.
20 units are defective and returned.
Adjustment Calculation:
To ensure a credit note is legally valid and audit-ready, it must contain specific and traceable information.
A credit note is a formal financial document that adjusts a previously issued invoice. It must clearly reference the original transaction and accurately reflect the reduced value, especially for VAT reporting and reconciliation.
Below is the structured format every credit note should follow:
Every credit note must clearly link to the original transaction to maintain traceability and prevent duplication. It should include:
Both parties must be clearly identified to meet legal and VAT compliance standards. Include:
The purpose of the credit note must be specific and aligned with the financial adjustment. Common reasons include:
Each affected item must be listed individually to maintain clarity and accounting accuracy. The table should include:
A valid credit note should include proof of internal authorization, such as an authorized signature, digital approval trail, or internal approval reference. Proper authorization strengthens internal controls and ensures audit readiness.
Once the structure is clear, the next step is understanding when a credit note should actually be issued and how the adjustment flows through the accounting system.
Credit notes appear in specific, documented scenarios where the original invoice amount needs formal reduction. Understanding these scenarios and the workflow prevents confusion, speeds up resolution, and keeps both parties' books accurate.
Here are six specific scenarios that trigger credit notes:
Once the reason for issuing a credit note is confirmed, the adjustment follows a defined accounting process.
Understanding this workflow prevents miscommunication, sets proper expectations, and ensures smooth resolution for both seller and buyer.
Now that you understand both documents individually, let's put them side by side to see exactly how they differ and when to use each one.
The confusion between debit notes and credit notes causes more accounting errors in businesses than almost any other document mix-up.
They sound similar, both adjust invoices, and both require ZATCA compliance, but they work in opposite directions and serve completely different purposes. Getting this wrong means rejected ZATCA submissions, incorrect financial records, and confused suppliers or customers wondering why their balances don't match.
Here's the definitive breakdown showing exactly how these documents differ:
A debit note is issued when the original invoice needs an upward adjustment or correction from the buyer’s side. It is commonly used for shortages, underbilling, or additional agreed-upon charges.
A credit note is issued when the seller needs to reduce the invoice value. It is typically used for sales returns, overbilling corrections, or post-sale discounts.
The difference becomes clearer when you look at how each document moves financial value. A debit note is issued when a discrepancy affects the payable amount. It can either increase or reduce the buyer’s liability depending on the situation. For example:
A credit note, however, always reduces the original invoice amount. It is issued by the seller to decrease receivables due to returns, pricing errors, or post-sale discounts.
In short, a debit note adjusts the payable based on context, while a credit note consistently lowers the invoice value.
Debit and credit notes directly impact revenue, expenses, receivables, and payables, depending on the transaction type.
In a debit note (purchase return), the buyer reduces Accounts Payable and Purchase Expense, while the supplier reduces Accounts Receivable and Sales Revenue.
In a credit note (sales return), the seller reduces Sales Revenue and Accounts Receivable. The buyer correspondingly reduces Accounts Payable or records a credit balance if payment was already made.
A debit note adjusts input or output VAT depending on the correction type. However, a credit note reduces taxable value and output VAT for the seller, and reduces input VAT for the buyer.
Incorrect classification can directly impact VAT filings and reconciliation accuracy.
Here’s a detailed side-by-side comparison:
Also Read: Understanding Debits and Credits in Accounting
Optimize your accounting workflows and eliminate errors, automate debit and credit note handling, ensure VAT compliance, and gain full visibility into your financial adjustments with HAL ERP today.
Manual notes and invoice adjustments can quickly become messy without system control. This is where a structured accounting platform makes a difference.
HAL’s integrated accounting and finance platform is built for growing retail and trading businesses that need structured, VAT-compliant, and real-time financial control. It connects sales, inventory, procurement, and finance in one unified system, so every debit note, credit note, invoice, and payment updates the books automatically.
Key capabilities of HAL are:
Discover how HAL can bring automation, compliance, and real-time financial control to your business.
Finzey, a Saudi fintech company, implemented HAL ERP to fix fragmented accounting processes, VAT inconsistencies, and manual reconciliation issues. Before HAL, invoice adjustments and tax reporting required multiple system checks and manual journal entries.
With HAL ERP, all invoicing, credit notes, and debit notes were directly linked to original transactions. Each adjustment automatically updated the general ledger, receivables/payables, and VAT records in real time, eliminating duplicate entries and reconciliation gaps.
Impact:
This case clearly shows how HAL ERP converts invoice adjustments into structured, compliant, and fully automated financial workflows.
Debit notes and credit notes directly affect your revenue, expenses, payables, receivables, and VAT liability. When managed manually, they often lead to posting errors, delayed adjustments, and tax reporting mismatches.
HAL automates the entire process; every credit note and debit note is linked to the original invoice, updates the general ledger instantly, adjusts input/output VAT correctly, and syncs with inventory and POS in real time. No duplicate entries. No manual reconciliation.
If your business handles frequent returns, supplier adjustments, or pricing corrections, it’s time to manage credit and debit notes in a structured way.
Book a demo and discover how HAL brings accuracy, compliance, and full financial control to every adjustment.
Yes. If a supplier underbilled or extra costs were agreed upon after the invoice, a debit note formally requests the additional amount and updates the accounting records.
Credit notes should be retained as part of accounting and tax records for at least 5 years in Saudi Arabia, as required for ZATCA compliance and potential audits.
Yes. Multiple adjustments can be made to a single invoice if there are separate discrepancies, returns, or corrections. Each note must reference the original invoice to maintain a clear audit trail.
Not directly. Debit and credit notes adjust accounting balances, but actual cash movement occurs only when payments or refunds are made.
While not always legally mandatory, using debit and credit notes ensures accurate accounting, proper VAT reporting, and audit compliance. They standardize how adjustments are tracked in financial systems.
