Final answer:
When returning faulty inventory, a business should issue a debit note to the supplier, which is a formal request for a credit note that reflects the returned goods' value.
Step-by-step explanation:
When a business returns faulty inventory to the supplier, the correct document to use is a debit note. This is essentially a formal request for a credit note. The debit note notifies the supplier that they have debited their account with the value of the returned goods due to a return or non-compliance with the purchase terms. It is the initial document that triggers the transaction.
Later, the supplier should acknowledge the debit note by issuing a credit note. The credit note serves as confirmation that the credit has been recognized. It can also be seen as a negative invoice, as it offsets the amount that the buyer owes to the seller. In contrast, a sales invoice is issued by a seller to signal that a transaction has taken place and that payment is due for the items delivered, while a receipt is given to acknowledge the receipt of payment. Thus, the use of proper documentation is critical in accounting for and managing inventory and transaction disputes.