Business transactions are recorded on source documents. Examples include sales and purchase orders, invoices and credit notes.
1.1 Types of source documents
Whenever a business transaction takes place, involving sales or purchases, receiving or paying money, or owing or being owed money, it is usual for the transaction to be recorded on a document. These
documents are the source of all the information recorded by a business.
Documents used to record the business transactions in the 'books of account' of the business include the following.
x Quotation. A business makes a written offer to a customer to produce or deliver goods or services for a certain amount of money.
x Sales order. A customer writes out or signs an order for goods or services he requires. x Purchase order. A business orders from another business goods or services, such as material
supplies.
x Goods received note. A list of goods that a business has received from a supplier. This is usually prepared by the business’s own warehouse or goods receiving area.
x Goods despatched note. A list of goods that a business has sent out to a customer. x Invoice. This is discussed further below.
x Statement. A document sent out by a supplier to a customer listing all invoices, credit notes and payments received from the customer.
x Credit note. A document sent by a supplier to a customer in respect of goods returned or overpayments made by the customer. It is a ‘negative’ invoice.
x Debit note. A document sent by a customer to a supplier in respect of goods returned or an overpayment made. It is a formal request for the supplier to issue a credit note.
x Remittance advice. A document sent with a payment, detailing which invoices are being paid and which credit notes offset.
x Receipt. A written confirmation that money has been paid. This is usually in respect of cash sales, eg a till receipt from a cash register.
1.2 Invoices
Aninvoicerelates to a sales order or a purchase order.
x When a business sells goods or services on credit to a customer, it sends out an invoice. The details on the invoice should match the details on the sales order. The invoice is a request for the customer to pay what he owes.
x When a business buys goods or services on credit it receives an invoice from the supplier. The details on the invoice should match the details on the purchase order.
The invoice is primarily a demand for payment, but it is used for other purposes as well, as we shall see. Since it has several uses, an invoice is often produced on multi-part stationery, or photocopied, or carbon-copied. The top copy will go to the customer and other copies will be used by various people within the business.
1.2.1 What does an invoice show?
Most invoices are numbered, so that the business can keep track of all the invoices it sends out. Information usually shown on an invoice includes the following.
(a) Name and address of the seller and the purchaser (b) Date of the sale
(c) Description of what is being sold
(d) Quantity and unit price of what has been sold (eg 20 pairs of shoes at $25 a pair)
(e) Details of trade discount, if any (eg 10% reduction in cost if buying over 100 pairs of shoes) (f) Total amount of the invoice including (usually) details any of sales tax
(g) Sometimes, the date by which payment is due, and other terms of sale
1.2.2 Uses of multi-part invoices
As stated above invoices may be used for different purposes. x Top copy to customer as a request for payment
x Second copy to accounts department to match to eventual payment
x Third copy to ware house to generate a despatch of goods, as evidenced by a goods despatched note.
x Fourth copy stapled to sales order and kept in sales department as a record of sales.
Key term
Please note that businesses will design their own invoices and there may be other copies for other departments. Not all businesses will need four part invoices. A very small business may use the customer copy of the invoice as a despatch note as well. In addition, the sales invoice may be stapled to the sales order and both documents passed to the accounts department.
1.3 The credit note
China Supplies sent out an invoice for 20 dinner plates, but the typist accidentally typed in a total of $162.10, instead of $62.10. The china shop has been overchargedby $100. What is China Supplies to do?
Alternatively, when the china shop received the plates it found that they had all been broken in the post and that it was going to send them back. Although the china shop has received an invoice for $62.10, it has no intention of paying it because the plates were useless. Again, what is China Supplies to do? The answer is that China Supplies sends out a credit note. A credit note is sometimes printed in red to distinguish it from an invoice. Otherwise, it will be made out in much the same way as an invoice, but with less detail and 'Credit Note Number' instead of 'Invoice Number'.
Acredit note is a document relating to returned goods or refunds when a customer has been overcharged. It can be regarded as a negative invoice.
1.4 Other documents
The following documents are sometimes used in connection with sales and purchases. (a) Debit notes
(b) Goods received notes
Adebit note might be issued to adjust an invoice already issued. This is also commonly achieved by issuing a revised invoice after raising a credit or debit note purely for internal purposes (ie to keep the records straight).
More commonly, a debit note is issued to a supplier as a means of formally requesting a credit note. Goods received notes (GRNs) record a receipt of goods, most commonly in a warehouse. They may be used in addition to suppliers' advice notes. Often the accounts department will require to see the relevant GRN before paying a supplier's invoice. Even where GRNs are not routinely used, the details of a
consignment from a supplier which arrives without an advice note must always be recorded.
Question
Credit noteFill in the blanks.
'China Supplies sends out a . . . to a credit customer in order to correct an error where a customer has been overcharged on an . . . ..'
Answer
Credit note; invoice.