Learning Outcomes
After reading this article, you will be able to explain the function of the purchases and purchase returns day books, identify and record discounts received, process purchase returns, and post these entries correctly in the accounting records. You will also understand key terminology and the typical workflow for recording purchases, discounts, and returns in line with the ACCA FA1 requirements.
ACCA Recording Financial Transactions (FA1) Syllabus
For ACCA Recording Financial Transactions (FA1), you are required to understand how purchases, returns, and discounts are documented and processed for bookkeeping and exam purposes. Specifically, you should be familiar with:
- The role and structure of the purchases day book and purchase returns day book
- The process of recording credit purchases and returns in the books of prime entry
- How to account for and distinguish various types of discounts received from suppliers
- The procedure for posting purchase and return transactions, including discounts, into the general ledger
- Recognising and coding supplier invoices and credit notes for accurate entry
- Properly handling and recording purchase returns, credit notes, and adjustments
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.
-
When a business receives a credit note from a supplier for returned goods, which book of prime entry should the transaction be recorded in?
-
What is the effect of a trade discount on the amount recorded in the purchases day book?
-
A supplier’s invoice for $1,200 includes an early settlement discount of 5% if paid within 14 days. If the business pays within the discount period, how is the discount recorded in the books?
-
True or False: Discounts received from suppliers are always recorded at the time of purchase.
Introduction
Accurate recording of purchases, purchase returns, and discounts received is fundamental in bookkeeping for any business. The purchases day book and purchase returns day book are essential records used to summarise credit transactions with suppliers before entries are posted to the appropriate ledgers. Understanding how to process discounts and returns, and how to handle the associated documentation, ensures the completeness and correctness of financial records.
Key Term: Purchases day book
A book of prime entry used to record all credit purchases of goods and services from suppliers before posting to the general ledger.Key Term: Purchase returns day book
A book of prime entry used to record goods or services returned to suppliers that were originally bought on credit.
THE PURCHASES DAY BOOK
Purchases of goods and services on credit are first listed in the purchases day book. This book summarises all supplier invoices for the period and provides the basis for double entry postings. Only credit purchases are entered; cash purchases are recorded directly in the cash book.
Key Term: Trade discount
A deduction from the list price granted by a supplier at the point of sale, usually to encourage bulk purchases or as a commercial incentive.Key Term: Settlement discount
Also called ‘cash discount’ or ‘early settlement discount.’ A reduction offered by a supplier if payment is made within a specified period after the invoice date.
Calculating Amounts for Entry
Trades discounts are deducted from the supplier’s list price before entering the transaction into the purchases day book. Settlement discounts are not deducted unless payment is made within the required timeframe; the full invoice value is initially recorded.
Worked Example 1.1
A business receives an invoice for $2,000 for office supplies, less a trade discount of 10%. The invoice offers a 2% settlement discount if paid within 14 days. The business intends to pay after 30 days.
Question: What value is entered in the purchases day book?
Answer:
The net value after trade discount is $2,000 x 90% = $1,800. The purchases day book entry is $1,800. Settlement discount is ignored at this stage as payment will not be made early.
Exam Warning
Be careful not to deduct settlement discounts in the purchases day book unless early payment is certain and agreed. Trade discounts are always deducted before recording the purchase.
PURCHASE RETURNS DAY BOOK
If goods are returned to a supplier or a reduction is agreed due to faults or errors, the supplier will usually issue a credit note. These credit notes are listed in the purchase returns day book before posting to the ledgers.
Key Term: Credit note
A document sent by a supplier, reducing the amount owed by the business, commonly issued for returned goods.
Worked Example 1.2
On receiving a credit note for $500 from a supplier for damaged inventory previously bought on credit, where should the transaction be recorded and what is the double entry?
Answer:
The credit note is listed in the purchase returns day book. The double entry is: Debit payables (to reduce the amount owed to the supplier), Credit purchases returns (to record the return).
DISCOUNTS RECEIVED: RECORDING AND POSTING
Discounts received reduce the net cost of purchases and may arise due to trade or settlement terms agreed with suppliers.
Posting to the Ledgers
At the end of the recording period, the totals from the purchases day book and purchase returns day book are posted to the general ledger. Settlement discounts, if taken, are recorded at the point of payment in a discounts received account.
Key Term: Discounts received
Income earned by the business as a result of taking up settlement discounts or similar reductions from suppliers.
Worked Example 1.3
A supplier’s invoice totals $1,000 after trade discounts. The business pays within 10 days and receives a settlement discount of 3%. How is this recorded at payment?
Answer:
At purchase: Purchases account debited $1,000, Payables account credited $1,000.
At payment: Payables debited $1,000; Bank credited $970; Discounts received credited $30.
PROCESSING PURCHASE RETURNS AND ADJUSTMENTS
Returned goods or agreed supplier adjustments require accuracy to ensure that the purchases and payables balances are correct. Credit notes should always be matched to original invoices before posting.
Revision Tip
Always reconcile supplier statements and credit notes with your purchase returns day book. This helps avoid errors and disputes over amounts owed.
Summary
The purchases and purchase returns day books are essential records for capturing credit transactions with suppliers and any subsequent returns. Discounts received, whether trade or settlement, must be treated according to when and how they are earned. Careful recording and correct posting ensure that the general ledger accurately reflects supplier balances, purchases, and any returns or discounts.
Key Point Checklist
This article has covered the following key knowledge points:
- Identify and use the purchases day book and purchase returns day book as books of prime entry
- Record trade discounts in the purchases day book and exclude settlement discounts unless they are taken
- Process purchase returns and record credit notes in the purchase returns day book
- Post totals from day books to the general ledger accurately
- Record settlement discounts received in the discounts received account only at the point of payment
- Explain the importance of matching credit notes to original purchases
Key Terms and Concepts
- Purchases day book
- Purchase returns day book
- Trade discount
- Settlement discount
- Credit note
- Discounts received