## **Learning Outcomes**

After reading this article, you will be able to identify which costs form part of an inventory purchase, including carriage and packaging, and which should be recorded as separate expenses. You will be able to apply trade discounts and sales tax correctly when calculating invoice totals. You will also be able to describe the key documents that support inventory purchases, and make the basic double-entry records needed for invoices that include multiple cost components.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you must understand:

- how purchase invoices are checked against supporting documentation before payment
- how to record purchase transactions including trade discounts and sales tax
- how to code supplier invoices for entry into the accounting system (including more than one nominal code)
- the purpose and content of key documents used in purchase transactionsS
- why documents are retained and how they support later queries and reporting

## **Test Your Knowledge**

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

1. A supplier invoice for inventory shows: goods \$2,000 less trade discount 10%, carriage inwards \$80, packing \$20, sales tax 20%. What is the **sales tax amount**?
   - A. \$360
   - B. \$380
   - C. \$400
   - D. \$420

2. True or false? Settlement discounts are recorded in the ledger at the point the invoice is received.

3. State two documents (other than the invoice) used to confirm that goods billed by a supplier were ordered and received.

4. Which cost is normally treated as a **selling/distribution expense** rather than part of the cost of purchases?
   - A. Carriage inwards charged by a courier
   - B. Customs duty on imported inventory
   - C. Delivery cost to send goods to a customer
   - D. Non-returnable packing charged by the supplier

5. **True/False**: If a business is registered for sales tax and receives a valid tax invoice, input sales tax is normally posted to a sales tax ledger account, not to purchases.

## **Introduction**

Inventory purchases are not always priced as “goods only”. Suppliers may add delivery charges, packing charges, and sales tax, and they may allow trade discounts. If you record these items wrongly, your purchases figure, payables balance, and gross profit can all be wrong.

For FA1, you need to read purchase documents carefully, decide what each line represents, and code it to the correct ledger account. You also need to know which documents support the transaction so that invoices can be checked and filed properly.

## **Purchase price components: what should be included?**

When you buy inventory, the starting point is the supplier’s invoice. Your job is to split the invoice into its parts (goods, carriage, packaging, sales tax) and record each part to the right place.

### **List price and trade discounts**

Suppliers often quote a list price but then allow a trade discount (for bulk buying or being a regular customer). You record the purchase at the **net** amount after trade discount.

> **Key Term: trade discount**
> A reduction in the list price of goods, agreed in advance. It is deducted before sales tax is calculated.

If goods are returned later, the supplier normally sends a credit note for the goods value (and sometimes sales tax). Returns reduce purchases (or are recorded in a purchases returns account).

### **Settlement discounts**

A settlement discount is different: it depends on paying within the discount period. It is not part of the invoice total at the date the invoice is recorded.

> **Key Term: settlement discount**
> A discount offered for early payment of an invoice. It is recorded when payment is made (if taken), not when the invoice is first recorded.

### **Sales tax on inventory purchases**

If a business is registered for sales tax and has a valid tax invoice, sales tax on purchases is normally recorded separately as “input” sales tax. It is not part of purchases.

> **Key Term: input sales tax**
> Sales tax charged by suppliers on purchases. If recoverable, it is recorded in a sales tax ledger account rather than included in purchases.

If the business is **not** registered (or cannot reclaim the tax), the sales tax is part of the cost paid and is usually recorded as part of the expense/purchase.

### **Carriage and freight: inwards vs outwards**

Delivery and transport costs often appear on invoices either as a separate line or as a separate invoice from a courier.

> **Key Term: carriage inwards**
> The cost of bringing inventory to the business premises (for example, supplier delivery or courier charges). It is treated as part of the cost of purchases.
>
> **Key Term: carriage outwards**
> The cost of delivering goods to customers. It is treated as a selling/distribution expense, not part of purchases.

A simple rule for FA1 questions:

- **Carriage inwards** supports getting goods ready for sale, so it goes with purchases/cost of sales.
- **Carriage outwards** supports making the sale to the customer, so it goes with selling expenses.

### **Packaging and packing charges**

Suppliers may charge for packaging in several ways. You must work out whether it is a cost you will keep, or a refundable deposit.

> **Key Term: non-returnable packaging**
> Packaging that the buyer keeps (for example, boxes, wrapping, shrink wrap). It is usually treated as part of the cost of purchases.
>
> **Key Term: returnable packaging deposit**
> A refundable amount charged for containers that will be returned to the supplier. It is recorded separately from purchases because it should be recovered when the packaging is returned.

If a deposit is refunded through a credit note, the credit note should be matched to the original purchase documentation and posted against the deposit balance (and payables, if still unpaid).

## **Source documents that support inventory costs**

For FA1, you should know the common purchase document flow and why each document matters. These documents also support later queries with suppliers and provide evidence for tax and financial reporting.

### **The core documents for a purchase**

> **Key Term: purchase order**
> A document sent by the buyer to the supplier requesting specified goods or services. It shows quantities, agreed prices and terms.
>
> **Key Term: delivery note**
> A document that accompanies the goods delivered by the supplier. It lists items delivered and quantities, usually without prices.
>
> **Key Term: goods received note (GRN)**
> An internal document raised by the buyer to confirm what was actually received and inspected. It supports checks that goods billed were received in good condition.
>
> **Key Term: purchase invoice**
> A document issued by a supplier requesting payment for goods or services supplied. It is a main source document for recording purchases and payables.

### **Checking and matching (why “carriage” and “packing” need evidence)**

When an invoice includes carriage or packing, the accounts team should still confirm it is valid and agreed. Typical checks include:

- Is the charge stated on the purchase order or agreed terms?
- Does the delivery note/GRN confirm the goods were delivered?
- Does the invoice reference the correct purchase order number?
- Are the calculations correct, including trade discount and sales tax?

If carriage is invoiced separately by a courier, you still need evidence that the delivery happened (for example, signed delivery paperwork) and that the rate is agreed.

### **Document retention**

Organisations keep purchase documents so that they can answer supplier queries, support tax records, and prepare financial statements. Documents may be stored physically or electronically, but they must be easy to retrieve and stored securely.

## **Recording carriage, packaging and purchase price in the ledgers**

In many questions, a single supplier invoice will need more than two ledger codes (for example: purchases, carriage inwards, sales tax, trade payables). In a computer system, you enter each line with the correct nominal code so the ledgers update correctly.

### **Worked Example 1.1**

A business receives a supplier invoice for inventory:

- Goods: 100 units at \$5 each
- Trade discount: 10% on goods
- Carriage inwards: \$30
- Packing (non-returnable): \$20
- Sales tax: 20% on the net amount

Prepare the analysis and the double entry.

> **Answer:**
>
> $$
> \begin{aligned}
> \text{Goods before discount} &= 100 \times 5 = 500 \\
> \text{Trade discount} &= 10\% \times 500 = 50 \\
> \text{Net goods} &= 500 - 50 = 450 \\
> \text{Net invoice before sales tax} &= 450 + 30 + 20 = 500 \\
> \text{Sales tax} &= 20\% \times 500 = 100 \\
> \text{Invoice total} &= 500 + 100 = 600
> \end{aligned}
> $$
>
> Double entry (invoice date):  
> Dr Purchases \$450  
> Dr Carriage inwards \$30  
> Dr Packaging \$20  
> Dr Sales tax (input) \$100  
> Cr Trade payables \$600

### **Worked Example 1.2**

A supplier invoice shows:

- Inventory goods: \$200
- Returnable packaging deposit: \$40 (refundable on return)
- Sales tax: 20% on goods only  
  Later, the packaging is returned and the supplier issues a credit note for \$40.

Record (1) the invoice and (2) the credit note.

> **Answer:**
>
> (1) Invoice:
>
> $$
> \begin{aligned}
> \text{Sales tax on goods} &= 20\% \times 200 = 40 \\
> \text{Total payable} &= 200 + 40 + 40 = 280
> \end{aligned}
> $$
>
> Dr Purchases \$200  
> Dr Returnable packaging deposit \$40  
> Dr Sales tax (input) \$40  
> Cr Trade payables \$280
>
> (2) Credit note for deposit return:  
> Dr Trade payables \$40  
> Cr Returnable packaging deposit \$40

### **Exam Warning**

- Do not record settlement discounts at the invoice date. Record them only if taken when you pay.
- Apply trade discount before calculating sales tax.
- Do not mix up carriage inwards (cost of purchases) with carriage outwards (selling expense).
- If sales tax is recoverable, keep it out of purchases and post it to the sales tax ledger account.

### **Revision Tip**

Practise “invoice analysis” layouts: list each invoice line and write the ledger account next to it (Purchases / Carriage inwards / Packaging / Sales tax / Payables). This is a fast way to avoid missed components in exam questions.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Purchase cost is not just the goods price; invoices may include carriage, packing, discounts and sales tax.
- Trade discounts reduce the purchase price before sales tax is calculated.
- Settlement discounts are recorded only when payment is made (if taken).
- Carriage inwards is part of the cost of purchases; carriage outwards is a selling/distribution expense.
- Non-returnable packaging is usually treated as part of the cost of purchases.
- Returnable packaging deposits are recorded separately and cleared when refunded.
- Purchase invoices should be checked against purchase orders, delivery notes and GRNs before payment.
- Purchase documents should be retained and filed so they can be retrieved for queries and reporting.

## **Key Terms and Concepts**

- trade discount
- settlement discount
- input sales tax
- carriage inwards
- carriage outwards
- non-returnable packaging
- returnable packaging deposit
- purchase order
- delivery note
- goods received note (GRN)
- purchase invoice


Inventory records and documentation - Carriage, packaging, and purchase price components