The paper trail

Andrew Harrington outlines the different types of documentation involved in credit sales

Many businesses sell their goods on credit terms, allowing their customers to delay payment once the goods have been received. A flow of documents between buyer and seller is essential if these transactions are to be correctly recorded and controlled. This article concentrates on the position of the seller.

On receipt of a purchase order from the buyer, the seller will check to see that the goods requested are available in stock. Assuming this to be so, the goods will be despatched to the buyer together with a seller-generated document – a delivery note. This specifies what is being delivered – which items and in what quantities – and allows the buyer to check that the correct goods have been received.

The delivery note also forms the basis of the next seller-generated document – the invoice. The key purpose of the invoice is to tell the buyer what must be paid for the goods delivered. Each invoice will have a unique identifying number, and will show the names and addresses of both buyer and seller, together with the date of sale. Full details of the goods supplied will be included, including prices and quantities. Relevant discounts (e.g. for trade customers or for bulk purchases) will be deducted and VAT will be added (assuming the seller is VAT-registered). Any terms of trade (e.g. discounts offered for prompt settlement) will be detailed.

The invoice is probably the most important document of all: not only does it provide evidence of the debt incurred, but it also forms the basis of the double entry in both the seller’s and the buyer’s books. If the seller is VAT-registered, it will also (in most cases) give rise to a tax point – the date on which VAT is charged. This date is vital, since it indicates when the VAT collected on the sale will be paid over to HMRC.

Credit notes, statements of account, remittance advice slips
Assuming there are no problems with the supply of goods, the invoice should eventually be paid. However, some goods may be returned (perhaps because they were faulty or damaged, or perhaps because they were supplied in error). In such cases, the seller will prepare a credit note. This document shows how much is owed to the buyer, and may also be prepared to correct an overcharge. It is very much like an invoice in reverse, and its format and content will be very similar. It will usually refer to the original invoice for cross-referencing purposes, and may be printed in red to distinguish it from invoices. Again, it will form the basis for double entry in both sets of books.

At regular intervals (often monthly), the seller will prepare and send a statement of account. This summarises all transactions with the buyer since the previous statement (invoices, credit notes and payments) and shows how much is currently owed by the buyer. Invoices due or overdue for payment will often be highlighted. It may include a tear-off remittance advice – a document that would otherwise be prepared by the buyer to accompany payment. The remittance advice analyses the payment, showing which invoices are being settled, and thus making it easier for the seller to update records.

In summary, buying and selling on credit gives rise to a number of documents. From the seller’s perspective, the invoice is probably most important, since this will lead to eventual payment by the buyer (as well as forming the basis for the double entry). However, all documentation is vital to ensure that sales and collection systems operate correctly and efficiently.

Andrew Harrington runs www.teachmenow.net and is a lecturer and author