Sales cycle and documentation - Orders, dispatch, invoices, ...

Learning Outcomes

After reading this article, you will be able to describe the full cycle of a typical sales transaction, identify and explain the function and content of key sales documents (such as orders, dispatch/delivery notes, invoices, and credit notes), recognise the purpose of document checks and authorisation, and apply these principles in recording sales and sales returns accurately for ACCA exam revision.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand how sales transactions are documented, processed, and controlled from start to finish. This article addresses the following key syllabus points:

• The purpose and content of sales documents: orders, dispatch/delivery notes, sales invoices, and credit notes
• The flow of documentation in sales transactions and their use as source documents in accounting records
• The correct preparation, authorisation, and checking procedures for invoices and credit notes
• The significance of credit periods and settlement terms
• The relationship between sales, sales returns, and related controls

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. What is the main purpose of a delivery note in the sales process?
   1. To request payment from a customer
   2. To record evidence of goods delivered
   3. To grant a trade discount
   4. To authorise purchase orders
2. Which document reduces the amount owed by a customer due to returned goods?
   1. Sales invoice
   2. Statement of account
   3. Credit note
   4. Purchase order

3. List the correct sequence of the main documents issued by a seller in a typical credit sales cycle.

4. True or false? A sales invoice can be issued before goods are dispatched to the customer.

Introduction

Accurate documentation is essential for handling sales and ensuring reliable accounting records. Every sales transaction involves a series of documents, each serving a distinct role from initiating an order to resolving any issues post-sale. Understanding the correct order, content, and significance of orders, dispatch/delivery notes, invoices, and credit notes is critical for recording transactions and preparing for the ACCA FA1 exam.

Key Term: sales order
A written or electronic document from the customer requesting specific goods or services from the seller.

Key Term: delivery note
A document provided by the seller and sent with goods to the customer, confirming the items delivered.

Key Term: sales invoice
A document issued by the seller requesting payment from the customer, detailing goods or services supplied and the amount due.

Key Term: credit note
A document provided by the seller to the customer to reduce the amount owed, commonly due to the return of goods or errors on the original invoice.

THE SALES CYCLE: DOCUMENTATION AND FLOW

A typical sales transaction involves several sequential documents:

1. Sales Order: The transaction begins when the customer issues a sales order, formally requesting goods or services.
2. Dispatch Note and Delivery Note: Once the order is accepted, the seller arranges dispatch. A dispatch note instructs internal staff to prepare the goods, while a delivery note accompanies the goods to provide a record for both seller and customer.
3. Sales Invoice: After confirming dispatch, the seller prepares a sales invoice, officially requesting payment and detailing the items sold.
4. Credit Note (if needed): If goods are returned or an overcharge is discovered, a credit note is issued to adjust the customer's balance.

DOCUMENT PURPOSES AND CONTENT

Each sales document has a specific function:

• Sales Order: Contains customer details, description and quantity of goods, agreed prices, and delivery requirements. It provides the seller with confirmation and details for processing.
• Dispatch/Delivery Note: Lists items despatched and their condition. Upon delivery, the customer often signs the delivery note as acknowledgment of receipt.
• Sales Invoice: Presents the final charge, identifies settlement terms, and often lists discounts, sales tax, and total amount due. This document serves as the main source for recording the sale in the accounts.
• Credit Note: Used to correct the sales ledger when goods are returned, prices are reduced, or overcharges are rectified. It always references the original invoice.

Key Term: settlement terms
The agreed timescale and conditions for payment, including any discounts for prompt payment.

CONTROLS AND CHECKS IN THE SALES CYCLE

Controls at each stage of the sales cycle help prevent errors and support reliability of records:

• Order Checking: Verify all orders for accuracy, pricing, and authorisation before processing.
• Dispatch Verification: Check dispatch against the order and prepare a delivery note with matching details.
• Invoice Preparation: Match sales invoice content to the order and delivery note. Confirm calculations, tax, and discounts.
• Authorisation: Invoices and credit notes should be checked for accuracy and formally approved before sending to customers.
• Returns and Credit Notes: Ensure all goods returns are verified physically and by documentation before issuing a credit note.

Worked Example 1.1

A company, Delta Supplies, receives an order from Samir Retail for 20 boxes of paper at $50 each. The goods are dispatched with a delivery note. On arrival, Samir Retail finds 2 boxes are damaged and returns them within the agreed period.

Question: Outline the documents that Delta Supplies should produce for this transaction and the sequence in which they are issued.

Answer:

1. Sales order (from Samir Retail to Delta Supplies)
2. Delivery note (from Delta Supplies sent with goods)
3. Sales invoice (for 20 boxes, $1,000, from Delta Supplies to Samir Retail)
4. Credit note (for 2 boxes returned, $100, reducing the amount owed to $900)

Worked Example 1.2

A seller prepares an invoice for goods delivered, including 5% settlement discount if paid within 10 days. The invoice is for $1,500 net of any trade discount and lists $300 sales tax.

Question: What details must be included on the sales invoice for it to be a valid source document?

Answer:
Customer and seller’s name and address, invoice number and date, description and quantity of goods, unit price, trade and settlement discounts, sales tax rate and value, total amount due, settlement terms, and payment instructions.

Exam Warning

Many students confuse a credit note with an invoice. Remember, a credit note always reduces a customer's debt, while an invoice requests payment. Issuing a new invoice for returns instead of a credit note may cause accounting errors.

DOCUMENT FLOW SUMMARY

The correct chronological order of the sales documentation:

1. Sales Order
2. Dispatch/Delivery Note
3. Sales Invoice
4. Credit Note (if necessary)

Documents like statements of account and remittance advices may follow, but are not part of the initial transaction cycle.

Summary

The sales cycle is built around key documents: the sales order starts the process, dispatch and delivery notes provide evidence of goods leaving and being received, invoices formalise the charge, and credit notes resolve any post-sale adjustments. Each document must be carefully checked, matched, and authorised to ensure reliable accounting.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the function and sequence of orders, dispatch/delivery notes, invoices, and credit notes in the sales cycle
• Describe the key content and authority checks required for each document
• Identify how and why credit notes are issued
• Recognise good practice in checking and authorising sales invoices and credits
• Outline the documents required to evidence a sales return
• List the standard document flow in a credit sales transaction

Key Terms and Concepts

• sales order
• delivery note
• sales invoice
• credit note
• settlement terms