ACCOUNTS RECEIVABLE POLICY: DEBIT NOTES

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APPROVED BY:

REVISION DATE:

EFFECTIVE DATE:

The following sample outlines a set of policies and procedures for receiving debit notes raised by
customers in situations where goods are returned or rejected.

PURPOSE

A debit note is raised by the customer to the supplier in situations in which goods are returned or rejected.
This policy documents the procedures to be followed depending on the reason for the raise of the debit
note.

DEFINITIONS

EDI: Electronic Data Interchange

POD: Proof of Delivery
RA: Returns Advice

PROCEDURES

GENERAL
Clear the oldest debit notes and the debit notes with the highest dollar values first.
To keep track of the debit notes with the highest dollar values, look at the A/R New Debit Notes report
each morning. Filter the report so that it shows only the accounts and only those items which are $X or
over.
The credit manager generally filters out the items that are clearly marked as advertising. These will be
directed to other personnel and will be sent back if they have been miscoded or if more information is
needed.

UNSALEABLES
Unsaleables are the easiest debit notes to clear. An unsaleables deduction occurs when a customer has
product that is outdated, damaged, etc. This is product that the customer has already received into

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inventory, not product that was damaged by the carrier while being delivered to the customer (product
damaged by the carrier would be classified as a shortage; see below). Sometimes unsaleables invoices
are referred to as "damaged goods invoices" or as "reclamation invoices."
Most customers provide a copy of the unsaleables invoice either with the check remit (in which case cash
applications attaches it to the deduction) or separately (in which case it may be in the customer’s backup
file with cash applications). If no debit memo has been received within a couple of months of the
deduction, contact the customer and request a copy.
If the unsaleables deduction is over $X, check the return authorization logs to see if the returns
coordinator has issued a return authorization for the damaged product. Some customers contact the
returns coordinator regarding unsaleables, but many "destroy and deduct" automatically.
Most customers charge a handling/processing fee for destroying or returning unsellable product.
Calculate the handling percentage they are adding on to the invoice subtotal, and add that percentage to
calculations for the various products listed on the invoice.

DAMAGED GOODS ALLOWANCES

Most customers receive this allowance built into their invoices in place of taking claims for unsaleable
product. However, there are a few customers who take damaged goods allowances rather than
unsaleable claims, and these are not built into their invoices. They must be processed as a regular
deduction.

SHORTAGES
A shortage deduction is taken by the customer when they receive less product than that for which they
are invoiced. Shortage deductions can occur for the following reasons:
 Carrier shortage: The carrier loses or damages product. The customer should note on the proof of
delivery that the product was short or damaged/ refused.
 Warehouse shortage: The number of cases shipped by the warehouse as noted on the bill of lading
does not match the number of cases for which customer was invoiced.
 Company X shortage: The customer’s invoice does not match what they received due to an order
entry error or invoicing error.
Cash applications will collect a copy of each of the following documents when they post and copy a
shortage deduction:
 Check remit
 Invoice
 Customer’s debit memo—if there is one
 Bill of lading (there will normally be no bill of lading for carrier shortages; also, some customers take
the "customer pick-up" option from a different warehouse than the standard one)
 POD (if the carrier is a small or obscure one, cash app will not provide the POD—contact carrier
directly or request POD from the warehouse)
Things to look for when researching shortage deductions:
 If customer does not provide a debit memo, check the POD to see if there are any "exceptions"
(shortages, overages, or damages) noted. If not, contact the customer to see whether the deduction is
in fact a shortage claim.
 Write the number of cases claimed short on the invoice next to the appropriate product. This is
important for cash applications, who will file the freight claim if necessary.

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 Check to make sure that the number of cases on the invoice matches the number of cases shipped
according to the bill of lading for the product(s) in question.
 Check to make sure that the number of cases noted short/ damaged on the POD matches the number
of cases claimed short by the customer on their deduction. Some customers will note a specific
number of cases short; some customers will simply note the number of cases received; see if it
matches total number of cases shipped on bill of lading to determine if there was a shortage.
 If the shortage deduction is valid, clear via credit memo.
 If the shortage deduction is the carrier’s responsibility, make a copy of all the related paperwork and
put in appropriate bin in returns coordinator’s office.
 If the shortage deduction is invalid, do not clear. Either send a chargeback letter to the customer or
make a copy of the paperwork and send for collection. Note any action taken on the customer
comments database.
All carrier shortages should be written off as "carrier/no freight claim" shortages. We do not file freight
claims for ground shipments.
Any shortage less than $X is written off as a "customer shortage" because A/R does not take the time to
research them.

PRICING ALLOWANCES
Pricing deductions occur when 1) the customer has been given a special pricing deal that was not noted
on the purchase order, meaning the deal is not processed at time of invoicing, so the customer deducts,
or 2) the customer’s purchase order reflects a price that is lower than our invoice price, and the purchase
order is accepted as is.
Generally, the invoice should be compared to the purchase order to determine whether or not a pricing
deduction is valid. The following codes should be taken into account when examining EDI purchase
orders: "01" denotes a bill back deduction—this is usually advertising and should be sent to head office;
"02" denotes an off-invoice price allowance that should be cleared via credit memo. There are exceptions
to these "rules."
There are a number of customers who receive special pricing allowances on their invoices. See the list of
these (which is not comprehensive) and e-mails regarding customers who normally take this type of
deduction.
If a customer claims a price allowance that is not verified per the purchase order, e-mail the appropriate
RVP (regional vice president) and/ or the broker to question the allowance. Only clear if the RVP confirms
the validity of the deduction.
Invalid price allowances should not be sent for collection; rather, we should make our own collection
efforts, possibly with the assistance of the broker (some are better than others at assisting with this task).

RETURNS
Returns occur for a number of reasons:
 The customer may refuse a shipment or part of a shipment because it is damaged or because they
say they did not order it or it is a duplicate shipment. These types of returns are usually initiated by the
carrier.
 The customer may return goods they have already taken into stock, due to the deletion of an item,
goods are outdated, etc. These returns are usually initiated by the customer/ broker.
 Damaged goods/unsaleables over $X should be returned according to company policy. However,
some of our customers destroy all unsaleables without ever contacting us for a return authorization.

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Returns that are invoice-related are usually easy to match up. Either the customer will not pay for the
invoice—if they are returning an entire invoice shipment—or they will deduct for the product that was
damaged and refused when they make their invoice payment.
Return of unsaleables product is usually easy to match up also. The customer normally sends the returns
coordinator a list of their unsaleables invoice that will match the unsaleables invoice they send when they
deduct for the product. Often they will note our RA number somewhere on the invoice.
Return of goods that are not related to a particular invoice and that are being returned for other reasons
than damages are the most difficult to match up. The customer normally uses a debit memo number that
bears no relation to our RA number or to any other reference point we may have. Sometimes the brokers
are helpful in determining if a deduction matches a particular return, but not always.
Normally deductions/unpaid invoices that are related to returns should not be written off until returns
coordinator has received a copy of the warehouse receiver showing that the goods came back. If an RA
is over six months old and no warehouse receiver has been sent to us, it may be appropriate to write off
the deduction/ invoice using a return POD.

FINES/PENALTIES
All fines/ penalties except pallet charges are sent to the director of credit by the cash applications team.
Pallet charges may be cleared without director of credit approval. Other fines/ penalties need his approval
before being cleared.

LUMPER CHARGES
When a customer charges for an "unloading" service at the time of delivery, this is called a lumper
charge. These deductions are usually $X or $X.

SERVICE FEES
Some customers charge a standard fee (ranging from $X to $X) for processing deductions on their
payments to us. These should be cleared as "customer" responsibility, "service fees." This is an
administrative charge, not a fine or penalty for violation of customer’s policy.

UNRESEARCHED DEDUCTIONS
Unless there is some indication given by the customer via debit memo, etc. about the nature of a
deduction that is less than $X, that deduction can be cleared as "unresearched." If the nature of the
deduction is evident, determine if valid and clear using the appropriate classifications.

ADVERTISING
Deductions that are coded as advertising at the time of cash application normally do not cross the
account analyst’s desk, especially if backup for the deduction is available to the credit manager.
If there is an "AD" deduction on a customer’s account that is over six months old without any notations in
the customer comments database, go ahead and request backup from the broker or from the customer
(with advertising deductions, most customers prefer that we start with the broker in trying to obtain
backup). When requesting documents from the broker, copy the appropriate RVP (regional vice
president) on the e-mail request.
Often advertising deductions are coded as "UN" (unknown) at time of cash application due to the fact that
the nature of the deduction is not clear. Unknown deductions should definitely be researched and the
appropriate documents obtained. First, check the advertising backup files, since the actual deduction,
because of its coding, will not have had the opportunity to be matched up with the backup that supports it.
Second, check the general customer backup files. Third, go to the broker/ customer for backup.

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