## **Learning Outcomes**

After reading this article, you will be able to identify the main documents used to control inventory movements (goods inwards, goods outwards and returns). You will be able to explain how those documents link together to support checking, authorisation and accurate data entry. You will also be able to record purchases, sales, and returns using invoices and credit notes (including sales tax), and explain how returns affect revenue, purchases and cost of sales.

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

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

- the purpose and content of key business documents used for inventory movements, including delivery notes, invoices and credit notes
- how purchases and sales documents support accurate recording of credit transactions and sales tax
- how sales returns and purchase returns are documented and recorded within the accounting system
- how coding supports entry to the general ledger and customer/supplier accounts
- why document filing and retention is needed for control, queries and audit/tax checks

## **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. Which document is normally created by the buyer to confirm what quantity of goods has actually been received and accepted?
   - A. Sales invoice
   - B. Goods received note
   - C. Credit note
   - D. Statement of account

2. TrA delivery note is the main source document used to record revenue in the accounting records.

3. A supplier invoice is checked by comparing it to a purchase order and a goods received note. This control is called:
   - A. Contra
   - B. Three-way match
   - C. Aged analysis
   - D. Bank reconciliation

4. State two common reasons why a business would issue a credit note to a customer.

5. A purchase return (goods sent back to a supplier) on credit will normally:
   - A. Increase trade payables
   - B. Reduce trade payables
   - C. Increase sales
   - D. Reduce receivables

## **Introduction**

Inventory is often one of the largest assets in a trading business, and small recording errors can cause problems with profit measurement, customer service, and cash flow. For FA1, you are expected to know which documents support the movement of goods and which documents create the accounting entries.

Goods move in and out of the business every day, and returns are common. The accounting system needs an organised set of source documents (and checks) so that only valid, accurate transactions are recorded and paid.

## Inventory records and the document trail

### What an inventory record is used for

An inventory record tracks quantities so the business knows what is on hand, what needs re-ordering, and what has been issued to customers. It also helps you investigate differences, such as “invoice says 50 units but only 48 were received”.

> **Key Term: inventory record**
> A record (manual or computerised) that tracks quantities of each inventory item held, received, issued and returned, usually by item code.

### Documents vs accounting entries

Not every document creates a bookkeeping entry. In general:

- **Invoices and credit notes** are used to record amounts owed (and sales tax).
- **Delivery/receipt documents** support checking and authorisation and may update quantity records, but they do not usually post revenue or purchases by themselves.

### **Exam Warning**

In exam questions, do not treat a delivery note as proof of the amount owed. A delivery note supports “what happened to the goods”; an invoice supports “what is owed”.

## Goods inwards (purchases): documents and controls

### Typical goods inwards document flow

Goods inwards starts when you decide to buy inventory and ends when the supplier’s invoice is approved for payment. A common sequence is:

1. Purchase order sent to supplier
2. Goods delivered with a delivery note
3. Goods checked and accepted (goods received note produced)
4. Purchase invoice received and checked (then recorded in the accounts)

> **Key Term: purchase order**
> A document issued by a buyer to a supplier requesting specified goods/services, quantities and agreed terms.
>
> **Key Term: delivery note**
> A document listing goods delivered, usually showing quantities and item descriptions but not the amount owed.
>
> > s
> > **Key Term: goods received note (GRN)**
> > An internal document produced by the buyer confirming what was actually received and accepted after checking quantity and condition.
>
> **Key Term: purchase invoice**
> A supplier’s formal request for payment after supplying goods/services, used to record the purchase and the amount owed.

### Checking deliveries at goods inwards

When goods arrive, you normally check:

- quantity received vs delivery note and purchase order
- condition (damaged/faulty items)
- correct product or specification

If something is wrong, you should not approve the supplier invoice for payment until the issue is resolved (for example, missing goods, damaged items, wrong price).

### Three-way matching and authorisation for payment

A common control is to compare:

- the **purchase order** (what you asked for)
- the **GRN** (what you received and accepted)
- the **purchase invoice** (what the supplier is charging)

> **Key Term: three-way match**
> A control that compares the purchase order, GRN and supplier invoice before the invoice is approved for payment.

### Recording goods inwards transactions (FA1 focus)

For credit purchases of inventory, the purchase invoice is the main source document for the accounting entry. If sales tax applies, it is recorded when the invoice is recorded (not when it is paid).

You record trade discounts in the invoice values. Settlement discounts are recorded only if you pay early and take the discount.

### **Worked Example 1.1**

A business orders 100 units at a list price of 5 each, trade discount 10%, sales tax 20%. On delivery, 2 units are damaged and rejected. The supplier invoice is received for 100 units.

> **Answer:**
>
> **Step 1: Calculate the supplier invoice total (for 100 units).**  
> List price =
>
> $$
> 100 \times 5 = 500
> $$
>
> Trade discount =
>
> $$
> 10\% \times 500 = 50
> $$
>
> Net =
>
> $$
> 500 - 50 = 450
> $$
>
> Sales tax =
>
> $$
> 20\% \times 450 = 90
> $$
>
> Invoice total =
>
> $$
> 450 + 90 = 540
> $$
>
> **Step 2: What paperwork is needed for the damaged units?**  
> The GRN should show 98 units accepted. The supplier should issue a **credit note** for the rejected 2 units (or issue a corrected invoice).
>
> **Step 3: If a credit note is issued for 2 units, calculate it.**  
> List price =
>
> $$
> 2 \times 5 = 10
> $$
>
> Trade discount =
>
> $$
> 10\% \times 10 = 1
> $$
>
> Net =
>
> $$
> 10 - 1 = 9
> $$
>
> Sales tax =
>
> $$
> 20\% \times 9 = 1.8
> $$
>
> Credit note total =
>
> $$
> 9 + 1.8 = 10.8
> $$
>
> **Step 4: Accounting entries (credit transaction).**  
> Record the **invoice**, then record the **credit note** when received to reduce trade payables and input sales tax.

## Goods outwards (sales): documents and controls

### Typical goods outwards document flow

Goods outwards starts when a customer order is accepted and ends when a sales invoice is raised and recorded. A common sequence is:

1. Customer order accepted
2. Goods picked and packed
3. Despatch/delivery document produced
4. Sales invoice raised and sent to the customer

> **Key Term: despatch note**
> An internal document listing goods sent out from the warehouse to the customer, used to support picking and delivery.
>
> **Key Term: sales invoice**
> A document issued to a customer requesting payment for goods/services supplied, used to record the sale and the amount owed.

### Recording goods outwards transactions (FA1 focus)

For credit sales, the sales invoice is the source document for the accounting entry:

- Debit receivables (amount owed by the customer)
- Credit sales (net revenue)
- Credit sales tax (output tax)

Quantity records (inventory records) should be updated when goods are despatched and when returns are received, so that stock on hand is accurate.

## Returns and credit notes

### Sales returns (returns inwards): goods coming back from customers

When a customer sends goods back, you should check quantities and condition and record the return in both:

- **inventory records** (goods back into stock if re-saleable), and
- **accounting records** (reduce what the customer owes)

> **Key Term: returns inwards**
> Goods returned by customers to the seller, reducing revenue and the customer’s balance.
>
> **Key Term: goods returned note**
> A document raised when returned goods are received, showing items, quantities and the reason for the return.
>
> **Key Term: credit note**
> A document issued to reduce the amount a customer owes (or received from a supplier to reduce what you owe), often due to returns or invoice errors.

### **Worked Example 1.2**

A business sold goods on credit for 1,000 plus sales tax at 20%. The customer later returns goods with a net selling price of 200.

> **Answer:**
>
> Credit note net =
>
> $$
> 200
> $$
>
> Sales tax =
>
> $$
> 20\% \times 200 = 40
> $$
>
> Credit note total =
>
> $$
> 200 + 40 = 240
> $$
>
> **Double entry to record the sales return (credit note issued):**  
> Debit Sales returns 200  
> Debit Sales tax (output tax reduction) 40  
> Credit Trade receivables 240

### Purchase returns (returns outwards): goods sent back to suppliers

If goods received are faulty, damaged, or not what was ordered, you may return them to the supplier. The supplier should then issue a credit note to reduce what you owe.

> **Key Term: returns outwards**
> Goods returned by a business to its suppliers, reducing purchases and the supplier balance.

### Sales tax on returns

A credit note reverses part (or all) of the original invoice, including the sales tax. If you issue a credit note to a customer, your output sales tax reduces. If you receive a credit note from a supplier, your input sales tax reduces.

### Link to revenue, purchases and cost of sales

In the statement of profit or loss:

- revenue is shown net of sales returns
- purchases are shown net of purchase returns

A common cost of sales calculation is:
$$\text{Cost of sales} = \text{Opening inventory} + \text{Purchases} - \text{Purchase returns} - \text{Closing inventory}$$

## Filing, coding and retention of inventory documents

### Coding for accurate data entry

When documents are entered into a manual or computerised system, coding helps the transaction post to the correct accounts. Typical codes include:

- customer/supplier account codes (for receivables/payables ledger accounts)
- general ledger codes (sales, purchases, returns, sales tax)
- inventory item codes (to update quantities)

### Filing packs for purchases and sales

A practical filing method is to keep related documents together so you can answer queries quickly:

- **Sales file:** customer order, delivery/despatch document, sales invoice, and any later credit note
- **Purchases file:** purchase order, delivery note, GRN, supplier invoice, and any later supplier credit note

### Document retention and secure storage

Businesses usually keep documents for several years for tax, audit and dispute reasons. Many businesses store scanned copies, but you still need controls over access, backups, and protection from loss.

> **Key Term: document retention policy**
> A set of rules stating which business documents must be kept, where they are stored and how long they are kept.

### **Revision Tip**

Practise describing each document in one sentence: what it proves, who produces it, and what it is used for in the checking process. This is a common FA1 exam approach.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- inventory records track quantities and should agree to goods movement documents
- goods inwards uses purchase orders, delivery notes, GRNs and purchase invoices to support checks
- three-way matching helps stop incorrect invoices being approved for payment
- goods outwards uses despatch/delivery documents and sales invoices to record sales correctly
- returns inwards and returns outwards must be supported by return documents and credit notes
- credit notes reverse part/all of an invoice, including sales tax
- sales returns reduce revenue and purchase returns reduce purchases in profit reporting
- a retention policy and good filing makes later queries and checks easier to deal with

## **Key Terms and Concepts**

- inventory record
- purchase order
- delivery note
- goods received note (GRN)
- purchase invoice
- three-way match
- despatch note
- sales invoice
- returns inwards
- goods returned note
- credit note
- returns outwards
- document retention policy


Inventory records and documentation - Goods inwards, goods outwards, and returns