The first article of our series on sales and purchases.
Study Tips: Sales and purchases series
- 1 – Buying and selling
- 2 – Documentation behind buying and selling
- 3 – Difference between cash and credit transactions
- 4 – Sales and purchases in double entry bookkeeping
- 5 – Cash and credit transactions in double entry bookkeeping
Understanding the processes involved in sales and purchases, and the documentation used, is fundamental to being able to account for those transactions in a double entry bookkeeping system.
We’re going to go right back to the basics of all businesses – buying and selling.
In principle sales and purchases are a single process, but in practice they are dealt with as two separate procedures.
- Businesses sell goods and services to generate income. Sellers of goods (printer paper for example) call the people they sell to customers.
- Sellers of services (an accountant for example) call the people or businesses they sell to clients.
- The businesses that buy those goods and services call the businesses they buy from suppliers. The term supplier is used regardless of whether goods or services are bought.
Sales and purchases scenario
Emily sells Adam some stationery. There’s only one transaction but two businesses are involved so each looks at it from a different point of view: The seller of the goods is the supplier from the buyer’s point of view, and the purchaser of the goods is the customer from the seller’s point of view.
That makes Emily, Adam’s supplier, as he’s purchasing the stationery, and Adam Emily’s customer, as she’s making the sale.
This diagram shows the complete transaction:
We can see that it starts with Adam deciding to buy some stationery from Emily. He sends Emily the order and in return she delivers the stationery to Adam. He then checks what he’s received against the delivery note to ensure everything is correct against his order, and completes his goods received note (GRN). Emily then invoices Adam, who pays her. Adam records that he has spent money and Emily records that she has received money.
There is only one transaction but the actions involved with it are divided, with some of them taking place in the seller’s business and some in the buyer’s business, therefore we need to be able to separate the transaction into the sales function and the purchases function.
The sales process
A basic sales process is:
- A customer placing an order.
- The goods being delivered or services provided to the customer.
- An invoice is sent to the customer.
- The customer pays the invoice and a record is made to show how much was paid and where the money went, for example into the business bank account.
The purchases process
So what does that look like from a purchases point of view? Again all businesses will follow the same basic process:
- A business will decide who to buy from. They may have a list of approved suppliers.
- Then they raise a purchase order and send it to the supplier.
- The goods or services are received from supplier.
- Goods will have a delivery note with them, which will be checked against what’s actually been delivered to make sure it’s correct.
- A goods received note is completed to record that the goods were checked at the time they arrived.
- If there are any differences between what was ordered and what was received, these are queried with the supplier.
- When the invoice is received from the supplier, it is checked against the initial purchase order and also the delivery note and/or GRN.
It’s worth noting that the provision of services isn’t usually recorded on a delivery note or GRN. However, businesses will still check that what was provided was the same as what was ordered and invoiced for.
- The end of the process is when the business pays the invoice and records the expenditure.
Sales and purchases are part of the same process as there’s only one transaction when goods or services are bought/sold, however, in business they’re dealt with separately.
The sales function involves businesses selling goods and services to customers and clients. It includes raising invoices and generates incomes.
The purchases function is when businesses buy goods and services from suppliers. It involves checking invoices, and other documents, and means that the business has to spend money as it has incurred expenses.
In part 2 of this series, we’ll go on to look at the documentation involved in both buying and selling before tackling the subject of cash and credit transactions. Once we’ve covered all these business basics, we’ll be ready to apply all that knowledge and understanding to accounting for sales and purchases using a double entry bookkeeping system.
Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.