Study tips: Sales and purchases – part 2

The second 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

In part 1 of our sales and purchases series we looked at why sales and purchases are both part of the same process but are split into separate functions – half of a transaction takes place in the customer’s business and the rest in the supplier’s.

We’re now going to look at the basic documentation used in buying and selling and transfer our knowledge about the nature of sales and purchases to paperwork.

What do I mean by that?

Simply that, just as there’s only one transaction when something is bought/sold, there’s only one set of paperwork too, but it’s mixed up between the customer and supplier.

Some of it’s generated in the seller’s business and some in the buyer’s business. Both businesses will check paperwork, but the documents will differ depending on whether you’re the seller or buyer. This is why the one transaction gets separated into the two functions from a practical point of view.

Sales and purchases scenario

Let’s return to the example of Emily selling Adam some stationery and look at who generated which documents:

The table allows us to see the complete process and the paperwork involved. Now we’re going to separate it.

Sales documentation

The sales process involves documentation which is both received from the customer and generated by Emily’s business (she is the supplier).

The fundamental documentation is:

• Purchase order (received)
• Delivery note (generated)
• Invoice (generated)

Purchases documentation

The purchases process involves documentation which is both received from the supplier and generated by Adam’s business (he is Emily’s customer).

The fundamental documentation is:

• Purchase order (generated)
• Delivery note (received)
• Good Received Note (completed)
• Invoice (received)

In any transaction, the purchase order, delivery note and invoice are used by both the customer and the supplier. What we must understand is which business generates each document and which business checks it. That depends on whether you’re buying or selling and businesses, of course, do both.

The invoices

Invoices are a key document in both sales and purchases. Looking at it from the sales point of view, the business selling goods or services generates the invoice and sends it to the customer. From the purchases side, the customer checks the invoice and pays it.

Here’s the invoice Emily generated and sent to Adam:

As all invoices have to legally include certain information and use standard calculations, then understanding ‘an invoice’ is equally important for both generating sales invoices and checking purchase invoices.

• Invoice Number – this must be unique.
• Order No – this is the purchase order number. It is the link between the original order sent by the customer and the invoice generated by the supplier.
• Invoice Date – used along with the payment terms to work out when the invoice needs to be paid.
• Tax Point – used for VAT purposes.
• Customer name and address – invoices usually include the name and address of the customer.
• Supplier name and address – invoices must show the name and address of the supplier.

The difference between sales and purchase invoices

An easy way to identify the difference between a purchase invoice and a sales invoice is by looking at the names and addresses.

1. Sales invoice – your business’s name is pre-printed as part of a standard invoice template, which usually includes your logo too. All your sales invoices will look the same.
2. Purchase invoice – your business’s name will have been added to the invoice. All your purchase invoices will look different as each supplier will have their own templates.

In this case, Emily’s business’s name, address and logo are pre-printed so it’s her sales invoice.

Adam’s business’s name and address have been added, so it’s a purchase invoice from his point of view.

• Quantity, Description, Code – invoices will include a description of what items, and how many of each item, were bought.
• Unit price – how much each item costs.
• Net – the unit/item cost multiplied by the quantity.
  • For example, two packs of ink cartridges were bought: 2 x £20.56 = £41.12
• Total Net – the sum of all the net amounts added together.
  • In this case: £13.32 + £41.12 = £54.44
• VAT – Value Added Tax is added to the invoices of businesses that are VAT registered. The standard rate for VAT is currently 20%.
• Invoice Total – the sum of the total net amount and the VAT added together.
  • In this case: £54.44 + £10.88 = £65.32
  • The invoice total is a VAT inclusive figure because it includes the VAT that the customer must pay.  Because of this, it will always be more than the net amount.  Have a read of How to calculate VAT if this is an area you find tricky.
• Payment Terms – state the agreed timescale in which the invoice should be paid.
  • The payment terms of this invoice are ‘payment 14 days after the invoice date’.  Therefore the payment is due by 11^th May as the invoice is dated 27^th April.
• VAT No – VAT registered businesses must include their registration number.

Sales and purchases paperwork generally looks similar, so all the elements you’d come across have been covered above but you shouldn’t expect to see them on all documents.

In summary

In the next article, part 3 of this series, we’ll consider the differences between cash and credit transactions and the implications for accounting for cash sales and purchases in 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.