## Learning Outcomes

After reading this article, you will be able to identify and explain key business documents used in sales and purchases, including sales invoices, purchase invoices, and credit notes. You will understand their purposes, content, flow within a transaction cycle, and know how to properly check, authorise, and record these documents in the accounting system. You will also be able to recognise common errors and describe security and control measures required for these essential records.

## ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand the main documents and records used in both sales and purchases. This article covers:

- The purposes and required details of sales invoices, supplier (purchase) invoices, and credit notes
- The process for issuing, receiving, checking, and authorising invoices and credit notes
- How documents flow through a typical credit transaction (sales and purchases)
- Procedures for document control and record-keeping
- Common risks and controls over business documentation

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What is the primary purpose of a sales invoice for a business selling goods on credit?
2. Which document should be issued if a customer returns faulty goods that had already been invoiced?
3. Why must a purchase invoice be checked against a purchase order and delivery note before authorisation?
4. What key information is typically included in a credit note?

## Introduction

Business transactions rely upon accurate and reliable records, starting with the documentation that evidences each sale or purchase. Sales invoices, purchase invoices, and credit notes are essential documents for recording what a business sells or buys, the prices agreed, and any revisions due to errors or returns.

Understanding how to complete, check, and manage these documents is fundamental to accurate accounting, controls, and legal compliance. This article explains the function and key details of these documents and provides practical guidance for their correct use in everyday business processes.

> **Key Term: sales invoice**
> A written request sent to a customer demanding payment for goods or services supplied on credit. It lists details such as items delivered, prices, discounts, sales tax, and payment terms.
> **Key Term: purchase invoice**
> An invoice received from a supplier, requiring payment for goods or services the business has bought, usually on credit. For the supplier, it is a sales invoice.
> **Key Term: credit note**
> A document issued to reduce a previous invoice, often because goods were returned, invoiced in error, or supplied at a lower price.
>
> **Test Tip:**
> When revising Sales and purchase invoices and credit notes, connect each definition, method, or rule to the kind of question the assessment is likely to ask.

### Types and Flow of Business Documents

![Purchase invoice processing from purchase order, delivery note, and supplier invoice through three-way matching, payment authorisation, ledger entry, and exception handling.](https://static.pastpaperhero.com/images/acca-fa1-business-documents-and-records-sales-and-purchase-invoices-and-credit-notes_00.png)

_Accounts payable document flow shows three-way matching of order, receipt, and invoice before authorisation, liability recording, payment scheduling, or supplier investigation._

### Sales Invoice

A sales invoice is raised after a business delivers goods or completes a service on credit. The invoice acts as a notice to the customer that payment is due by the agreed date.

Typical sales invoice contents:

- Seller and customer names and addresses
- Invoice date and unique invoice number
- Customer account reference (if applicable)
- Order reference
- Full details of goods or services supplied (description, quantity, item price)
- Trade and/or settlement discounts
- Sales tax amount and rate
- Subtotal, tax, and final total payable
- Payment terms (e.g., "Net 30 days", discounts for early payment)
- Seller's sales tax registration number (if registered)

> **Key Term: trade discount**
> A deduction from the list price provided by the seller to certain buyers, often for large orders or loyal customers, shown on the invoice before tax is calculated.

### Purchase Invoice

When a business buys goods or services, it receives a purchase invoice from its supplier. This invoice must be checked carefully before payment is authorised and recorded in the accounts. The purchase invoice serves as proof of the amount owed.

Key steps before recording a purchase invoice:

- Confirm goods received match the invoice in type and quantity (check against the delivery note)
- Ensure the invoice price agrees with the original purchase order or agreed terms
- Check calculations and tax amounts are correct
- Obtain approval from an authorised person

### Credit Note

Credit notes correct previous invoices. They are usually raised when the customer returns goods (e.g., due to faults or over-delivery), or when an invoicing error is discovered.

A credit note:

- References the original invoice (by number)
- Explains the reason for the credit
- Specifies what items or amounts are reduced
- Shows any reductions in sales tax

Credit notes reduce the amount the customer owes and are recorded as sales returns by the seller and as purchase returns by the customer.

### Worked Example 1.1

A business sold office chairs to a customer for \$1,200, plus sales tax of 20%, with a trade discount of 10%. The customer returns \$300 worth of chairs due to damage.

What documents are involved, and how should the amounts be shown?

> **Answer:**
>
> 1. A sales invoice is issued for the net value after trade discount: \$1,200 × 90% = \$1,080; sales tax on this amount is \$216; total invoice \$1,296.
> 2. When the return occurs, the seller issues a credit note referencing the invoice, reducing the amount by \$300 × 90% = \$270 (net) plus \$54 sales tax, total \$324.
> 3. Customer now owes \$1,296 - \$324 = \$972.

### Document Controls and Record-Keeping

Maintaining control over documents is critical for reliable accounts and prevention of error or fraud. Good practice includes:

- Sequential numbering of invoices and credit notes
- Secure filing of original and supporting documents
- Timely matching of invoices with orders, delivery notes, and payment approvals
- Authorisation by designated personnel for credit notes and large invoices
- Clear policies for correcting errors and processing returns

Failure to operate strict controls can lead to duplicate payments, missed discounts, or unrecorded liabilities.

> **Key Term: authorisation**
> The official approval, usually by a responsible employee or manager, confirming the accuracy and validity of a document before it is processed for payment or recorded in the accounting system.
> **Key Term: settlement discount**
> A discount offered by the seller if the buyer pays an invoice before an agreed period, e.g., "2% if paid within 10 days".

### Recording Invoices and Credit Notes in the Accounting System

- Sales invoices are recorded as increases to sales revenue and receivables.
- Purchase invoices increase purchases/expenses and payables.
- Credit notes for sales are posted as reductions to sales revenue (returns) and receivables; for purchases, as reductions to purchases and payables.

### Worked Example 1.2

A supplier issues an invoice: 50 units at \$10 each, less 20% trade discount, plus 10% sales tax. The buyer returns 5 units (invoiced at the discounted rate) due to defects.

Calculate:
a) The amount to record as the original purchase and payable.
b) The amount for the purchase return and credit note.

> **Answer:**
> a) Invoice net: 50 × \$10 = \$500. After 20% trade discount: \$500 × 80% = \$400. Add 10% tax: \$400 × 10% = \$40. Amount payable: \$440.
> b) For 5 returned units: 5 × \$10 = \$50. Discounted: \$50 × 80% = \$40. Tax: \$4. Credit note: \$44. Payable reduced by this amount.
>
> **Exam Warning:**
> Failure to check whether a credit note has been issued (and correctly processed) can lead to overstating revenue or payable balances. Always trace credits to the original invoice for verification.

### Storage and Retention of Documents

Businesses must retain key documents (invoices, credit notes, supporting delivery notes, approvals) for statutory periods set by law or tax authorities, often three to six years. Documents can be kept electronically or physically but must be accessible and secure from loss or unauthorised access.

> **Key Term: document retention**
> The policy and practice of keeping business documents for a set period, to enable future reference, statutory compliance, and audit.

## Summary

Sales and purchase invoices, along with credit notes, are essential documents for evidencing, recording, and controlling business transactions. Proper creation, approval, recording, and storage of these documents supports the accuracy and reliability of the accounting system, reduces errors, and provides audit trails for internal and external checks.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- The role and contents of sales invoices, purchase invoices, and credit notes
- How to check, authorise, and record invoices and credit notes
- The flow of documents through a credit transaction
- Document security and retention responsibilities
- The significance of matching documents with the accounting system
- Common errors and control measures in document handling

## Key Terms and Concepts

- sales invoice
- purchase invoice
- credit note
- trade discount
- authorisation
- settlement discount
- document retention


Business documents and records - Sales and purchase invoices and credit notes