## **Learning Outcomes**

After reading this article, you will be able to explain the function of sales and purchases day books, correctly record transactions using invoices and credit notes, and recognize the accounting treatment of returns. You will also understand how these documents affect the general ledger and apply double-entry principles for typical scenarios as examined in ACCA FA2.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand the practical recording of business transactions and the role of key source documents. The following syllabus areas are directly addressed in this article:

- Record sales and purchases transactions in appropriate books of prime entry
- Record sales and purchases returns using credit notes and debit notes
- Understand and post invoices and credit notes to day books
- Distinguish between cash and credit transactions
- Prepare and update general ledger accounts from day books

## **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 source document for recording a credit purchase return?
   a) Sales invoice  
   b) Debit note  
   c) Credit note  
   d) Purchase order

2. Which account is credited in the general ledger when a credit customer returns goods?

3. True or false? All sales and purchases must be recorded in both the respective day book and the general ledger.

4. Briefly state the main difference between a trade discount and a return of goods.

## **Introduction**

When recording routine business activity, most transactions begin their journey in the books of prime entry—specifically, the sales day book and the purchases day book. These books draw on source documents such as invoices and credit notes to provide a record of sales, purchases, and related adjustments like returns. Accurate use of these documents is critical for maintaining reliable financial records and completing the double-entry process required for ACCA examination purposes.

> **Key Term: day book**
> A book of prime entry used to record the details of either sales (sales day book) or purchases (purchases day book) before posting to the general ledger.

## Sales and Purchases Day Books: Purpose and Structure

Sales and purchases day books act as preliminary records (books of prime entry) for large volumes of credit sales and purchase transactions. The sales day book lists credit sales invoices issued to customers, while the purchases day book logs supplier invoices for goods or services bought on credit.

Day books typically contain columns for:

- Date
- Customer or supplier name
- Invoice number
- Net amount
- Discounts (if any)
- Sales tax
- Gross amount

Cash transactions do not enter these day books—they are recorded separately.

> **Key Term: invoice**
> A source document identifying details of a sale or purchase transaction, including goods, quantity, price, and terms, issued by the seller to the buyer.
>
> **Key Term: credit note**
> A document issued when goods are returned or an allowance is granted, acknowledging a reduction in the amount owed.
>
> **Key Term: returns**
> Transactions involving the return of goods previously bought or sold, either as a purchase return (goods returned to a supplier) or sales return (goods returned by a customer).

## Invoices: The Starting Point for Recording Sales and Purchases

An invoice provides evidence of a sale (sales invoice) or purchase (purchase invoice) made on credit. Each sales invoice is recorded in the sales day book; each purchase invoice appears in the purchases day book. The totals from these day books are posted periodically (e.g. monthly) to the general ledger accounts for sales or purchases and the relevant receivables or payables accounts.

Goods or services sold for cash are not recorded in the sales day book—they go straight to the cash book.

### Trade and Settlement Discounts

Some invoices may show a trade discount—a deduction allowed at the time of sale, usually not recorded in the accounts but simply reflected in the reduced invoice amount. Settlement discounts, offered for early payment, are handled according to whether the customer actually takes up the offer and are discussed in detail in other articles.

> **Key Term: trade discount**
> A deduction from the list price granted at the time of sale, not shown separately in the bookkeeping records.

## Credit Notes and the Recording of Returns

Credit notes provide the documentary basis for sales returns (returns inwards) or purchase returns (returns outwards). A credit note reduces the amount owed by a customer (in the case of a sales return) or by the business to a supplier (in the case of a purchase return, where a debit note may also be used).

### How Returns Are Recorded

When goods are returned:

- Sales returns (returns inwards): The business issues a credit note to its customer, which is then entered in the sales returns day book.
- Purchases returns (returns outwards): The business may issue a debit note to its supplier and receives a credit note in response. The details are recorded in the purchases returns day book.

Totals from each returns day book are posted to the respective returns account in the general ledger (sales returns or purchases returns) and adjusted in the relevant receivables or payables accounts.

### **Worked Example 1.1**

A supplier sent you goods worth \$1,500 on credit. After inspection, you found \$300 of them were damaged and returned them. The supplier issued a credit note for \$300.

**Question:** How should this transaction be recorded in your accounting system?

> **Answer:**
>
> Post the purchase of \$1,500 to the purchases day book and purchase ledger. Then, record the return of \$300 in the purchases returns day book when the credit note is received. The purchases returns total is posted to the purchases returns account (credit) and the supplier's account (debit) in the payables ledger, reducing your liability.

### Posting Day Book Totals to the General Ledger

The totals of each column in the sales and purchases day books are posted at regular intervals (commonly monthly) by:

- Debiting the trade receivables account and crediting the sales account (for sales day book totals)
- Crediting the trade payables account and debiting the purchases account (for purchases day book totals)

Returns are posted in the opposite direction, reducing totals accordingly.

### **Worked Example 1.2**

During March, you issued credit sales invoices totaling \$8,000 and sales returns (via credit notes) totaling \$500 to customers.

**Question:** Explain the correct postings to the general ledger.

> **Answer:**
>
> At month-end, post:
>
> - Debit trade receivables \$8,000, credit sales \$8,000 (from the sales day book);
> - Debit sales returns \$500, credit trade receivables \$500 (from the sales returns day book).
>   The net effect in the trade receivables account is \$7,500 owed by customers for March's transactions.

### **Exam Warning**

Be careful not to record cash transactions in the sales or purchases day books. Only credit transactions belong in these books. Posting cash sales or cash purchases to these day books is an error frequently tested in the exam.

## Role of Debit and Credit Notes

A debit note is typically sent by the buyer to the supplier to request a credit for goods returned or overcharged. The supplier then issues a credit note for the agreed amount. Only the credit note provides authority to record a return or price adjustment in the accounting records.

> **Key Term: debit note**
> A document sent by a customer to a supplier outlining details of goods returned or an adjustment requested, ordinarily prompting a supplier's credit note.

## Practical Checklist for Day Book Recording

To ensure correct entries:

- Check every sales or purchase transaction for supporting documentation (invoice, credit note)
- Only record credit transactions in the day books
- Regularly reconcile day book totals to ledger account postings
- Ensure sales and purchases returns are supported by valid credit notes

## **Summary**

Sales and purchases day books capture details of credit transactions before posting summaries to the ledger. Invoices serve as the main evidence for entries; credit notes support sales and purchase return entries. Only credit transactions, not cash, are entered in the day books. Returns reduce totals and are reflected using credit notes in the returns day books. Careful handling of these documents ensures the integrity of accounting records and proper double-entry.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Recognize the function and content of sales and purchases day books
- Record invoices and credit notes correctly in day books and ledgers
- Distinguish between credit and cash transactions for day book entry
- Post day book totals accurately to general ledger accounts
- Account for sales and purchases returns using the correct documents

## **Key Terms and Concepts**

- day book
- invoice
- credit note
- returns
- trade discount
- debit note


Sales and purchases day books - Invoices, credit notes, and returns