Invoice, Debit Note, Credit Note, Stock, Work-in-progress

25/12/2020 1 By indiafreenotes


An invoice is a record of a sale or shipment made by a vendor to a customer that typically lists the customer’s name, items sold or shipped, sales price, and terms of the sale. In other words, it’s an itemized statement the reports the details of a sale for the buyer and seller’s records.

An invoice is a document created by the seller as evidence of a sales transaction between a buyer and the seller. It is often prepared in case of a credit sale. Nowadays invoices are prepared with the help of ERPs i.e. in a digital format yet they can also be prepared on paper.

It is a non-negotiable commercial document and normally contains details such as:

  • Date of transaction
  • Unique Identification Number
  • Details of Buyer
  • Quantity Sold
  • Price Per Item
  • Short Description of Items Sold
  • Amount
  • Taxes
  • Terms of Payment
  • Signature of the Authorized Party

Debit Note

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 is an 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 (as if the invoice is recorded in wrong 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 which the customer was actually charged for those goods.

When a seller receives goods returned by the buyer which were once sold on credit the seller also expects some form of confirmation from the buyer (on paper) related to the details of returned items. A debit note is a document sent by a buyer to the seller to confirm the details of goods returned (return outwards) and create an obligation for the seller to cancel the related dues.

It reduces the amount due to be paid back to the seller if the amount due is nil then it allows further purchases on behalf of that. The intent is to notify the seller that they’ve been debited against the goods returned.

A debit note is issued for the value of the goods returned. In some cases, sellers may send debit notes only to be treated as an invoice.

Few Characteristics of a Debit Note

  1. It is sent to inform about the debit made on the account of the seller along with the reasons.
  2. The purchase returns book is updated on its basis. (In case of return of goods)
  3. Usual reasons range from incomplete goods received, damaged/inaccurate goods received, etc.
  4. It is prepared like a regular invoice and shows a positive amount.

Credit Note

When a customer returns goods purchased on credit, he/she also expects some form of confirmation from the seller along with the cancellation of related dues. A credit note is a document sent by a seller to the buyer as a notification to acknowledge that the goods have been registered as (return inwards) and a credit has been provided to them for the eligible amount.

It reduces the amount due to be paid by the customer, if the amount due is nil then it allows further purchases in lieu of the credit note itself.

A credit note is issued for the value of goods returned by the customer, it may be less than or equal to the total amount of the order.

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

A credit notes 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 is 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.


In accounting there are two common uses of the term stock. One meaning of stock refers to the goods on hand which is to be sold to customers. In that situation, stock means inventory.

Stock is a security that represents a fraction of the ownership of the issuing corporation. It is issued to investors in the form of stock certificates.

The term stock is also used to mean the ownership shares of a corporation. For example, an owner of a corporation will have a stock certificate which provides evidence of his or her ownership of a corporation’s common stock or preferred stock. The owner of the corporation’s common or preferred stock is known as a stockholder.

Acquisition and Sale of Stock

Stocks may be acquired or sold on a stock exchange or via a private sale. A sale on a stock exchange is a relatively simple transaction, but can only be accomplished if the issuer has registered the shares, has been accepted by the applicable stock exchange, and is current in its filings with the Securities and Exchange Commission.

Common Stock

Common stock is the baseline form of stock, and includes the right to vote on certain corporate decisions, such as the election of a board of directors. In the event of a corporate liquidation, the common stockholders are paid their share of any remaining assets after all creditor claims have been fulfilled. If a company declares bankruptcy, this usually means that the holdings of all investors are either severely reduced or completely eliminated.

Preferred Stock

A company may issue either common stock or preferred stock. Preferred stock has special rights, which can vary by class of preferred stock. These rights typically include a fixed dividend amount, and may also include special voting rights.

Par Value

A share may have a face value, which is known as its par value. The par value is usually quite small, with $0.01 per share being a common amount. If a share has no face value, then it is said to be no-par stock.

Stock as Inventory

An alternative definition of stock is the finished goods inventory that a company has on hand and available for sale.


Work in progress (WIP) refers to partially-completed goods that are still in the production process. These items may currently be undergoing transformation in the production process, or they may be waiting in queue in front of a production workstation. Work in progress items do not include raw materials or finished goods. Work in progress is usually comprised of the full amount of raw materials required for a product, since that is added at the beginning of production, plus the cost of additional processing as each unit progresses through the various manufacturing steps.

Work in progress is typically measured at the end of an accounting period, in order to assign a valuation to the amount of inventory that is on the production floor. WIP is one of the three types of inventory, of which the others are raw materials and finished goods. Work in progress may be reported on the balance sheet as a separate line item, but is usually so small in comparison to the other types of inventory that it is aggregated with the other inventory types into a single inventory line item.

It is extremely difficult to assign an accurate cost to a WIP item, since there may be many WIP items in various stages of completion as of period-end. To make the accounting process easier, some companies complete all WIP items and transfer them into finished goods inventory prior to closing the books, so that there is no WIP to account for. An alternative is to assign a standard percentage of completion to all WIP items, on the theory that an average level of completion will be approximately correct when averaged over a large number of units.

Work in Progress or WIP, as the name suggests are the goods that are not complete and are at some stage of production. The item is inclusive of entire raw materials that go into the production. It also includes the cost of processing. Cost of processing is significant because each semi-finish product moves through the various manufacturing steps.

A firm accounts for the work in progress towards the end of the accounting period. The accounting of WIP helps a company to determine the value of inventory that is in the production process.

It is possible to estimate the amount of ending work in progress, though the result can be inaccurate, due to variations caused by actual scrap levels, rework, and spoilage. The calculation of ending work in progress is:

Ending work in progress = Beginning WIP + Manufacturing costs – Cost of goods manufactured