Business documents

Contents: 7 sections

Cambridge IGCSE Accounting 0452 · Core and Extended

Syllabus points

Recognise and understand the main business documents.
State the use of each document and who sends it to whom.
Complete simple business documents.
Distinguish trade discount from cash discount.

The documents in order

A credit sale generates a sequence of documents, and questions test whether you know which stage each one belongs to and which way it travels.

Document	Sent by	Sent to	Purpose
Invoice	Seller	Buyer	States what was supplied and how much is owed
Credit note	Seller	Buyer	Reduces the amount owed, for returns or an overcharge
Debit note	Buyer	Seller	Asks for a reduction; a request, not an adjustment
Statement of account	Seller	Buyer	Monthly summary of invoices, credit notes and payments, showing the balance due
Cheque counterfoil	Kept by payer		Record of a payment made
Receipt	Seller	Buyer	Proof that payment has been received
Paying-in slip counterfoil	Kept by depositor		Record of money paid into the bank
Petty cash voucher	Claimant	Petty cashier	Authorises and records a small cash payment

Two of these are regularly confused.

Debit note and credit note. The debit note goes from buyer to seller asking for money off. The credit note goes back from seller to buyer actually giving it. Only the credit note is recorded in the returns journals; the debit note is a request and is not entered in the books.

Invoice and statement. The invoice covers one transaction. The statement covers a period and lists all of them with a running balance. A statement is not entered in the books at all: it is used to check that the supplier's record agrees with yours.

What is on an invoice

The names and addresses of the seller and the buyer.
The invoice number and the date.
A description of the goods, the quantity and the unit price.
Trade discount, deducted from the list price.
The total amount due.
The terms, such as "net 30 days" or "2% cash discount if paid within 14 days".

E. & O.E. often appears at the foot, standing for errors and omissions excepted. It means the seller reserves the right to correct a mistake later.

Trade discount and cash discount

These behave completely differently, and the distinction is examined every year.

	Trade discount	Cash discount
Given for	Buying in bulk, or being in the same trade	Paying within a set time
Deducted	Before the invoice total	After, when payment is made
Recorded in the books?	Never	Yes
Appears as	Nothing at all	Discount allowed (expense) or discount received (income)

Goods with a list price of $2 000 carry 25% trade discount. The invoice is for $1 500, and $1 500 is the figure entered in the sales journal. The $500 appears nowhere.

If the customer then pays within 14 days and takes a 2% cash discount, they pay 2% less than $1 500, which is $30 off, so $1 470 is received. The seller records discount allowed of $30 as an expense; the buyer records discount received of $30 as income.

Why documents matter

They are the source for the books of prime entry. Nothing is entered without one.
They provide evidence if a dispute arises.
They allow figures to be checked against an independent record.
They help prevent fraud, since a payment without a supporting document stands out.

Which book each document feeds

Document	Book of prime entry
Sales invoice (copy)	Sales journal
Purchase invoice	Purchases journal
Credit note issued	Sales returns journal
Credit note received	Purchases returns journal
Cheque counterfoil, paying-in counterfoil, receipt	Cash book
Petty cash voucher	Petty cash book
Anything else	The journal

Common mistakes

Saying the debit note reduces the amount owed. It only requests the reduction.
Recording trade discount in the books.
Entering the statement of account in the ledger.
Calculating cash discount on the list price instead of on the invoice total after trade discount.
Saying an invoice is a request for payment received. It is issued by the seller.
Recording a credit note received in the sales returns journal.