Chapter 2 Selling Goods and Services

Chapter 2 Selling Goods and Services Notes

Core Function of Commercial Business

  • The primary function is to sell goods or services to make a profit.
  • Profit is directly linked to sales.

Cash Sales

  • In bookkeeping, a cash sale means an exchange of goods/services for immediate payment.
  • Payment methods include:
    • Cheque
    • Debit card
    • Bank transfer
    • Notes and coins
  • Even credit card payments are considered cash sales because the credit card company pays immediately.
  • To record a cash sale, you need:
    • Net amount (price without VAT)
    • VAT amount
    • Total amount received (including VAT)

Credit Sales

  • A credit sale involves selling goods/services with payment made later.
  • Common among businesses with payment terms like 7, 30, or more days.
  • Advantages:
    • Encourages more frequent purchases.
    • Helps customers with cash flow.
  • Supermarkets often operate with cash-paying customers and credit-based suppliers.
  • Before offering credit, businesses conduct checks on the customer's ability to pay.
  • Payment terms include:
    • Timeframe for payment
    • Credit limit (maximum outstanding amount)

Documents Involved in Making a Sale

  • Customers need to know the price of goods/services through:
    • Price lists
    • Catalogues
    • Advertisements on goods
  • Price lists ensure correct pricing on invoices.
  • Some businesses, like builders, provide estimates or quotations due to variable job costs.

Estimates vs. Quotations

  • Estimate: A rough idea of cost, not binding, and subject to change.
  • Quotation: A fixed price that cannot be changed once accepted.
  • Quotations should specify what is included and potential additional charges.
  • It’s good practice to include the valid period for a quotation and payment terms.
  • 'E&OE' (Errors and Omissions Excepted) protects the supplier from genuine errors.

Purchase Order

  • After accepting a quote, larger companies issue a purchase order (customer order).
  • A purchase order includes:
    • Reference number
    • Product code
    • Quantity
    • Full description of goods
    • Unit price and total price (for checking)
    • Authorizing signature and date
    • Invoice and delivery addresses
  • A customer order is a legal document that forms a contract upon acceptance.

Sales Order

  • The seller may create a sales order from the purchase order.
  • It confirms the order and can be internal or sent to the customer.
  • Useful for inventory control and determining purchasing needs.

Advice Note

  • An advice note is issued if delivery isn't immediate.
  • It confirms the acceptance of the purchase and informs the customer of delivery details.

Delivery Note

  • A delivery note accompanies the goods.
  • The buyer checks the delivery, and if satisfied, signs the note.
  • One part stays with the customer (for the accounts department), and the other returns to the supplier (proof of delivery).
  • It includes a delivery note number and a description of the goods delivered.
  • The price isn't shown, but a reference to the purchase order is usually included.

Invoice

  • An invoice itemizes goods/services, sale terms, and price.
  • It is a legal document, especially for VAT recording.
  • VAT invoices must include specific details (covered in Tax Processes for Businesses at Level 3 of the AAT course).
  • VAT is a tax on purchases; registration with HMRC is required when sales reach £85,000 (figure may change).
  • VAT registration means charging VAT on sales (except zero-rated and exempt items).
  • The standard VAT rate is 20% on most items.
  • An invoice should include:
    • Supplier's name and address
    • Invoice address
    • Delivery address (if different)
    • Unique invoice number
    • VAT registration number (if applicable)
    • Customer reference number
    • Purchase order number
    • Invoice date (tax point)
    • Product code (alpha-numeric)
    • Precise description of goods and quantity
    • Price per unit and total
    • Discounts (if applicable, as a percentage)
    • Net amount (before VAT)
    • VAT calculation at the appropriate rate (20%, 5%, or 0%)
    • Total invoice amount (including VAT)

Invoice Terms

  • E&OE: Errors and omissions excepted.
  • 30 days net: Payment due within 30 days.
  • COD: Cash on Delivery.
  • Ex-works: Price excludes delivery.
  • Carriage paid: Price includes delivery.
  • Prompt Payment Discount: Further discount for early payment (aka Settlement or Cash Discounts).
  • Net monthly: Payment due at the end of the following month.
  • Invoice books have multiple parts for the customer and business records.
  • Invoices can be sent and stored electronically.

Discounts

  • Discounts are used to increase sales.
  • Discounts to public:
    • Shown as a ‘sale price’.
    • Used for slow-moving, out-of-date, or obsolete stock.
    • Can be ‘loss leaders’ to attract customers to buy other full-price items.
  • Bulk buying discounts:
    • Offered for buying in large quantities (e.g., ‘buy one get one free’).
    • Percentage discount for buying over a certain quantity or spending over a specified amount.
    • Reduces distribution, selling, and admin costs.
  • Trade discounts:
    • Offered to business customers for repeat purchases.
    • Percentage of the total cost.
  • All discounts should be part of a written discount policy.

Calculating Trade Discounts

  1. Calculate the total price before discount.
  2. Calculate the trade discount amount.
  3. Calculate the net price before VAT.
  4. Calculate the VAT.
  5. Calculate the total invoice price.
  • Example Formulas:
    • Total Price Before Discount: 50 \times 75.00 = 3750.00
    • Calculate the trade discount: 3750.00 \times 10 \% = 375.00
    • Calculate the net price before VAT: 3750.00 - 375.00 = 3375.00
    • Calculate the VAT (at 20%): 3375.00 \times 20 \% = 675.00
    • Calculate the total invoice price: 3375.00 + 675.00 = 4050.00

Prompt Payment Discounts (PPD)

  • Offered for early invoice payment.
  • Terms indicate the discount (e.g., 2% off if paid within 7 days).
  • The supplier doesn’t know if the discount will be taken until payment or expiry.
  • VAT is recorded based on actual payment.
  • Two options for recording:
    1. Issue a credit note for the discount amount (including VAT).
    2. Include wording on the invoice stating the discount timeframe and that the customer can only recover VAT paid to the supplier.
  • The AAT exam will test PPD based on the credit note method.

Other Documents Relating to Sales

Goods Returned Note

  • Used when a customer returns faulty goods.
  • Includes:
    • Description of items
    • Quantity
    • Reason for return
    • Signature and date

Credit Note

  • A refund document stating that the customer no longer owes part or all of an invoice amount.
  • Reasons for using a credit note:
    • Proof that the original invoice doesn’t need to be paid in full.
    • Record of reduction in books.
    • Not an option to use cash refund sales.
  • The calculation is the same format as the original invoice.
  • It should take off the original trade discount.
  • It includes:
    • Original invoice number
    • Reason for return
    • Unique number
  • Invoice vs credit note: credit notes are sometimes in red.
  • Calculating a Credit Note:
    1. Calculate the total price before trade discount.
    2. Calculate the trade discount.
    3. Calculate the net price.
    4. Calculate the VAT on the reduced amount.
    5. Calculate the total of the credit note.

Calculating Credit Note Formulas:

  • Calculate the total price before trade discount: 2 \times 75.00 = 150.00
  • Calculate the trade discount: 150.00 \times 10 \% = 15.00
  • Calculate the net price: 150.00 - 15.00 = 135.00
  • Calculate the VAT on the reduced amount: 135.00 \times 20 \% = 27.00
  • Calculate the total of the credit note: 135.00 + 27.00 = 162.00

Statement of Account

  • Shows all transactions between a customer and supplier.
  • Used as a payment reminder.
  • Sent monthly to show outstanding invoices.
  • Includes:
    • Balance b/f (brought forward) from the previous month
    • New invoices
    • Payments
    • Credit notes (including PPD)
    • Remaining balance (c/f - carried forward)
  • Invoices (amounts owed) are debits (left side).
  • Payments and credit notes are credits (right side).
  • Transactions are listed in date order.
  • Only PPD are included, not trade or bulk discounts.

Bank Statement

  • Sent monthly by the bank summarizing account transactions.
  • Includes:
    • Account information
    • Detailed list of deposits and withdrawals
  • Helps businesses track finances, identify errors, and recognize spending habits.
  • Businesses should verify bank accounts monthly.
  • Payments on the left and receipts on the right (though some banks are aligning with statements of account).

Chapter Summary

  • Businesses use documents to track sales:
    1. Quotes and estimates
    2. Purchase orders
    3. Delivery notes
    4. Invoices
    5. Returns notes
    6. Credit Notes
    7. Customer statements
  • VAT is charged at 20%.
  • VAT is calculated on the reduced amount after trade/bulk discounts.
  • Special procedures for prompt payment discounts.
  • Credit notes should reflect trade/bulk discounts to match the sale.