## **Learning Outcomes**

By the end of this article, you will be able to explain how to record and manage payments to suppliers when full payment is not made in one transaction, when a business pays suppliers in advance, and when suppliers make refunds. You will know key terminology, understand documentation and double-entry processes, and avoid errors that are common in audit and exam scenarios.

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

For ACCA Recording Financial Transactions (FA1), you are required to understand the procedures and records relating to payments to suppliers, particularly in situations involving part payments, supplier advances, and refunds. The following syllabus areas are addressed in this article:

- The recording of payments to suppliers, including full, part, and advance payments
- Understanding the documentation and authorisation required for supplier payments and refunds
- Applying appropriate double-entry bookkeeping for part payments, advances, and refunds
- Recognising and correcting errors in supplier accounts, including handling supplier credits
- Reconciling supplier accounts and identifying discrepancies

## **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 business has an outstanding supplier invoice for \$400. It pays \$250 now and the balance next month. What is this arrangement called, and how is it recorded in the supplier’s payable account?
2. What documentation should support a payment made to a supplier before goods or services are received?
3. True or false? If a supplier refunds an overpayment, this should be treated as income in the accounts.
4. A supplier issued a credit note for \$120. How does this affect the supplier’s balance in the payables ledger?

## **Introduction**

Businesses rarely settle all supplier invoices in a single payment. Often, part payments are made, advances are provided before goods are delivered, or refunds are received due to overpayments or returned goods. Being able to correctly record these situations is a fundamental skill for ACCA FA1 candidates. It ensures accurate reporting of liabilities, avoids misstatements, and is essential for payments control and audit purposes.

> **Key Term: part payment**
> A payment that covers only a portion of the total amount owed to a supplier for an invoice or outstanding balance.
>
> **Key Term: advance payment**
> A payment made to a supplier before goods or services are received or before an invoice is issued.
>
> **Key Term: refund**
> Money returned by a supplier to the business, usually because of an overpayment, returned goods, or other adjustments.

## RECORDING PART PAYMENTS TO SUPPLIERS

In practice, a business may pay an invoice in more than one instalment. The supplier’s payables (creditor) account must provide a clear record of amounts owed and amounts paid.

### Recording Part Payments in the Payables Ledger

When an invoice is received, the full amount due is credited to the supplier’s payables account. Each payment made is debited against this account, reducing the outstanding liability. The balance in the payables ledger shows how much remains to be paid.

### **Worked Example 1.1**

A business receives a supplier invoice for \$800. It pays \$300 first, and the remaining \$500 two weeks later. Show the entries in the supplier's payables account.

> **Answer:**
>
> - Invoice received: Credit payables \$800.
> - First payment: Debit payables \$300 (and credit bank \$300).
> - Second payment: Debit payables \$500 (and credit bank \$500).
> - After both payments, the supplier account balance is \$0; the account is settled.
>   **Exam Warning**
>   Always match payments to supplier accounts using references (e.g. invoice numbers) to ensure that part payments are applied to the correct outstanding invoices. Failure to match can result in misallocated payments and incorrect account balances.

## RECORDING ADVANCE PAYMENTS TO SUPPLIERS

Sometimes, suppliers require payment before goods or services are delivered. The business pays in advance (often called a deposit or advance payment).

- When the advance is paid, an asset called 'Supplier Advance' or 'Prepayments' is recognised.
- Once the actual invoice is received and goods or services delivered, the advance is offset against the invoice.

### **Worked Example 1.2**

On 5 June, a business pays \$1,200 in advance towards an order of stock from Alpha Supplies. On 20 June, the goods are received and Alpha Supplies issues an invoice for \$2,000.

> **Answer:**
>
> - 5 June: Debit 'Supplier Advance' \$1,200, Credit bank \$1,200.
> - 20 June: Debit purchases (or inventory) \$2,000, Credit payables \$2,000.
> - Offset: Debit payables \$1,200 (reducing what is still owed), Credit 'Supplier Advance' \$1,200.
> - After offsetting, payables will show a \$800 balance due to Alpha Supplies.
>   **Key Term: prepayment**
>   An asset representing an amount paid in advance for goods or services to be received in the future.

## HANDLING SUPPLIER REFUNDS

Occasionally, a business may pay a supplier too much, or goods may be returned after payment. The supplier may refund cash to the business or issue a credit note.

- If the refund is paid in cash or returned to the bank, the business must record the receipt as a reduction of the payables account, not as additional income.
- If the supplier issues a credit note, this reduces the amount owed.

### **Worked Example 1.3**

A business pays a supplier \$500 in error instead of the correct \$400. The supplier refunds \$100. How is this recorded?

> **Answer:**
>
> - Overpayment: Debit payables \$400, debit payables \$100 (overpayment), credit bank \$500.
> - Refund received: Debit bank \$100, credit payables \$100.
> - The payables balance correctly reflects that nothing is owed, and bank is restored for the overpayment.
>   **Key Term: credit note**
>   A document issued by a supplier that reduces the amount owed by the business, usually for returned goods or overpayments.

## REFUNDS VIA CREDIT NOTES VS. CASH

Refunds may come as either direct cash returns or as credit notes:

- **Cash Refund:** Bank increases; payables account decreases.
- **Credit Note:** Reduces the outstanding amount with the supplier but does not affect the bank immediately.

A refund is not treated as new income for the business, but as a reduction of expenditure or liability.

### **Worked Example 1.4**

A business returns defective goods to Delta Ltd, who issues a credit note for \$250. How should the business record this?

> **Answer:**
>
> - Debit payables \$250, credit purchases returns \$250 (or credit purchases if small, depending on the system).
> - The liability to Delta Ltd is reduced by \$250.

## AUTHORISATION AND DOCUMENTATION

Payments and refunds require proper documentation and approval to protect against errors and fraud. Supporting documents may include supplier invoices, payment authorisations, remittance advices, and credit notes.

Before making part payments or advances, ensure documentation such as pro-forma invoices or signed contracts are in place. For refunds, keep correspondence and ensure any received funds are matched correctly.

## RECONCILING SUPPLIER ACCOUNTS

Regular reconciliation of individual supplier accounts with supplier statements is necessary, especially where there are part payments, advances, or refunds. This ensures all payments and credits are recorded and the balances match.

### **Revision Tip**

Check supplier statements against your payables ledger every month, especially if there are part payments or credit notes, to quickly identify missing payments or unmatched credits.

## **Summary**

Accurate recording of part payments, advance payments, and refunds ensures supplier accounts reflect true liabilities. Correct use of credit notes, matching of payments against invoices, and diligent documentation reduce mistakes and help maintain good supplier relationships.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain and record part payments to suppliers in the accounting system
- Record and offset advance (pre-)payments to suppliers
- Handle and record supplier refunds and credit notes accurately
- Understand the documentation and authorisation required for atypical supplier payments
- Reconcile supplier accounts, ensuring all payments, purchases, credits, and refunds are correctly matched
- Recognise common errors relating to part payments, advances, and refunds

## **Key Terms and Concepts**

- part payment
- advance payment
- refund
- prepayment
- credit note

Payments to suppliers - Part payments, advances, and refunds