Accounting for Sales, Purchases, and Returns: Books of Original Entry and Related Procedures

Accounting for Sales, Purchases, and Returns

Introduction

This chapter covers the accounting procedures for recording sales, purchases, and returns, focusing on the use of day books, ledgers, and the treatment of trade discounts, credit control, and related documents. Understanding these processes is essential for accurate financial reporting and effective management of receivables and payables.

Sales Transactions

Cash Sales

Cash sales occur when payment is made immediately at the time of sale, regardless of the payment method (cash, debit/credit card, PayPal, cheque, or bank transfer).

• Accounting Treatment: No need to record customer details or enter the transaction in the sales day book.

• Examples: Retail sales at supermarkets, online purchases paid at checkout.

• Additional info: Businesses may still record customer details for marketing or delivery purposes, but not in the accounting records.

Credit Card and PayPal Payments

• Credit Card Payments: Treated as cash sales for customer records, but a debtor (the credit card company) is created until payment is received.

• Double Entry: Debit the credit card company’s account (sales ledger), credit the sales account.

• PayPal Payments: Similar treatment, with the PayPal account debited instead of the credit card account.

Credit Sales

Credit sales (sales on credit) are transactions where payment is deferred to a future date. These are common in business-to-business transactions.

• Invoice: A document sent to the buyer detailing goods sold and prices. Known as a sales invoice to the seller and a purchase invoice to the buyer.

• Copies: Sellers keep copies for record-keeping, inventory, delivery, and proof of sale.

Sales Day Book

The sales day book is a book of original entry listing all credit sales for a period.

• Contents: Date, customer name, invoice number, folio reference, and invoice amount.

• Purpose: Used to post entries to the sales ledger and general ledger.

Example Table: Sales Day Book

Date	Customer	Invoice No.	Folio	Amount (£)
2020-09-01	D. Poole	16554	SL 12	560
2020-09-08	T. Cockburn	16555	SL 39	1,640
2020-09-28	C. Carter	16556	SL 125	220
2020-09-30	D. Stevens & Co	16557	SL 249	1,100

Posting Credit Sales

• Each credit sale is posted to the debit side of the customer’s account in the sales ledger.

• The total of the sales day book is posted to the credit of the sales account in the general ledger.

Double Entry for Credit Sales

• Debit: Customer’s Account (Sales Ledger)

• Credit: Sales Account (General Ledger)

Trade Discounts

Definition and Purpose

A trade discount is a reduction from the list price granted to certain customers, usually based on quantity purchased or customer type (e.g., wholesalers).

• Calculation: Deducted before invoicing; the invoice shows the discount and the net amount payable.

• No Double Entry: Trade discounts are not recorded in the accounting records; only the net amount is entered.

Example Table: Trade Discount Calculation

Customer Type	List Price (£)	Trade Discount (%)	Discount (£)	Net Price (£)
Large Trader	100	25	25	75
Small Trader	100	20	20	80
General Public	100	0	0	100

Credit Control

Procedures

• Set a credit limit for each debtor based on business size, transaction history, and credit rating.

• Monitor payment dates and follow up on overdue accounts.

• Withhold further supply or take legal action if payment is not received.

• Communicate consequences of late payment to customers.

Purchases Transactions

Purchases Invoices and Purchases Day Book

• Purchases invoices are received by the buyer and entered in the purchases day book if the purchase is on credit.

• The purchases day book lists all credit purchases, including date, supplier name, invoice number, folio, and amount.

Example Table: Purchases Day Book

Date	Supplier	Invoice No.	Folio	Amount (£)
2020-09-01	J. Blake	9/101	PL 49	560
2020-09-08	B. Hamilton	9/102	PL 50	1,380
2020-09-19	C. Brown	9/103	PL 51	230
2020-09-30	K. Gabriel	9/104	PL 52	510

Posting Credit Purchases

• Each credit purchase is posted to the credit of the supplier’s account in the purchases ledger.

• The total of the purchases day book is posted to the debit of the purchases account in the general ledger.

Double Entry for Credit Purchases

• Debit: Purchases Account (General Ledger)

• Credit: Supplier’s Account (Purchases Ledger)

Returns and Allowances

Returns Inwards (Sales Returns)

• Goods returned by customers are recorded in the returns inwards day book (also called sales returns day book).

• A credit note is issued to the customer, crediting their account for the returned goods.

Example Table: Returns Inwards Day Book

Date	Customer	Credit Note No.	Folio	Amount (£)
2020-09-08	D. Poole	9/37	SL 12	40
2020-09-17	A. Brewster	9/38	SL 58	120
2020-09-19	C. Vickers	9/39	SL 99	290
2020-09-29	M. Nelson	9/40	SL 112	160

Returns Outwards (Purchases Returns)

• Goods returned to suppliers are recorded in the returns outwards day book (also called purchases returns day book).

• A debit note is sent to the supplier, and a credit note is received in return.

Example Table: Returns Outwards Day Book

Date	Supplier	Debit Note No.	Folio	Amount (£)
2020-09-07	R. Grant	9.22	PL 29	40
2020-09-16	B. Rose	9.23	PL 46	240
2020-09-28	C. Blake	9.24	PL 55	30
2020-09-30	S. Saunders	9.25	PL 87	360

Double Entry for Returns

• Returns Inwards: Credit customer’s account (sales ledger), debit returns inwards account (general ledger).

• Returns Outwards: Debit supplier’s account (purchases ledger), credit returns outwards account (general ledger).

Statements of Account

Purpose and Content

• Sent monthly to each debtor, summarizing transactions and the balance due.

• Includes opening balance, invoices, credit notes, payments, and closing balance.

• Used by debtors to reconcile their records with the seller’s records.

Example Table: Statement of Account

Date	Details	Debit (£)	Credit (£)	Balance (£)
2020-09-01	Balance b/d	560		560
2020-09-02	Invoice 30756	880		1,440
2020-09-08	Returns 9/37		40	1,400
2020-09-25	Bank		880	520
2020-09-30	Balance c/d			520

Sales and Purchases via Credit Cards

• Sales to customers using credit cards are treated as cash sales for customer records, but a debtor is created for the credit card company.

• Commission charged by the credit card company is recorded as a selling expense, not as a deduction from sales.

Double Entry for Credit Card Sales

• On sale: Debit credit card company, credit sales.

• On receipt of funds: Debit bank, credit credit card company.

• For commission: Debit selling expenses, credit credit card company.

Internal Check and Invoice Verification

• Invoices should be checked at each stage by someone other than the person responsible for sending or paying them.

• Checks include verifying receipt of goods, order details, prices, calculations, and condition of goods.

• Prevents fraud, errors, and unauthorized payments.

Factoring

Factoring is a financial service where a business sells its trade receivables to a factor (financial intermediary) to improve cash flow.

• Services include sales accounting, collection, credit management, and financing against invoices.

• Helps businesses manage cash flow and reduce the risk of bad debts.

Errors and Omissions Excepted (E&OE)

• ‘E&OE’ is a disclaimer on invoices and documents indicating that errors or omissions may exist and recipients should verify figures before acting.

Summary of Key Learning Points

• Cash sales are not entered in the sales day book; credit sales are.

• Trade discounts are not recorded in the accounts; only net amounts are entered.

• Credit control is essential to prevent cash flow problems.

• Purchases day book records credit purchases; similar procedures apply as for sales.

• Returns inwards and outwards are recorded in their respective day books and posted accordingly.

• Statements of account help reconcile balances between sellers and debtors.

• Credit card sales create a debtor for the card company; commission is a selling expense.

• Internal checks on invoices prevent fraud and errors.

• Factoring can improve cash flow for businesses with significant receivables.