2.1 Sales Invoices and Credit Notes
Key Takeaways
- A sales invoice is a legal document requesting payment for goods or services supplied on credit, forming the primary audit trail for sales revenue.
- A sales credit note is issued to reduce the customer's outstanding balance, typically due to returned goods, overcharges, or pricing disputes.
- Bookkeepers must perform a three-way match between the customer's purchase order, the delivery note, and the sales invoice before entering transactions.
- Correcting pricing or quantity discrepancies immediately prevents incorrect ledger entry and avoids customer payment delays.
Credit Transactions in Business
In business-to-business (B2B) commerce, goods and services are rarely settled in cash immediately. Instead, transactions are conducted on credit terms, allowing customers to pay after a set period, such as 30 days. To maintain an accurate record of these transactions and establish a clear audit trail, bookkeepers rely on source documents. The two primary source documents for customer transactions are sales invoices and sales credit notes. These documents provide the objective evidence required to record credit sales in the accounting system.
The Sales Invoice: Purpose and Key Information
A sales invoice is a legal document issued by a seller to a credit customer. It serves as a formal request for payment and outlines the details of the credit sale. For businesses registered for Value Added Tax (VAT) in the UK, the sales invoice is a legal requirement to show the tax point (the date the transaction is deemed to occur for tax purposes).
A compliant sales invoice must include the following information:
- Seller and Buyer Details: Names, addresses, and contact details of both parties.
- Invoice Date: The date the invoice is issued, which is critical for determining the payment due date and VAT accounting period.
- Unique Invoice Number: A sequential number that prevents duplication and ensures completeness in the accounting records.
- VAT Registration Number (VRN): The seller's 9-digit UK tax registration number.
- Description of Goods or Services: Details of the items sold, including product codes and quantity.
- Unit Prices: The price per item before any discounts or taxes.
- Discounts: Deductions such as trade discounts applied to the list price.
- Net Amount: The total value of the goods or services before VAT.
- VAT Rate and Amount: The rate charged (usually the UK standard rate of 20%) and the calculated tax value.
- Gross Amount: The total amount the customer must pay, calculated as Net + VAT.
- Payment Terms: The payment deadline (e.g., 'Net 30 days') and accepted payment methods.
The Sales Credit Note: Purpose and Triggers
A sales credit note is a document issued by a seller to a buyer to reduce the amount the customer owes on a previously issued invoice. It acts as a negative invoice.
A credit note is triggered by several circumstances:
- Returned Goods: The customer returns unwanted, incorrect, or faulty inventory.
- Damaged Items: The goods are damaged in transit, and the seller agrees to reduce the invoice price rather than requiring a return.
- Pricing Errors: The customer was overcharged due to an incorrect unit price or a missing trade discount.
- Quantity Mismatches: The customer received fewer items than invoiced.
- VAT Adjustments: Adjusting the VAT element when a customer utilizes a prompt payment discount.
A credit note must be clearly marked as 'Credit Note' and include a unique sequential number, a reference to the original invoice, the reason for the credit, and the corresponding net, VAT, and gross reductions.
Checking and Verifying Source Documents
Before any invoice or credit note is recorded in the day books, it must undergo a verification process. Recording inaccurate documents leads to errors in the general ledger, incorrect tax returns, and customer disputes.
Bookkeepers use a three-way matching process to verify transaction accuracy:
- Purchase Order (PO): The customer's order, verifying the agreed items and prices.
- Goods Despatched Note (GDN): Confirming the exact quantities delivered.
- Sales Invoice: Confirming that the invoice matches both what was ordered and what was delivered.
The arithmetic must also be verified using the following formulas:
- Net Amount = (Quantity * Unit Price) - Trade Discount
- VAT = Net Amount * 20%
- Gross Amount = Net Amount + VAT
Identifying Discrepancies and Actions to Take
If a discrepancy is identified during verification, the bookkeeper must act before making entries in the books:
- Price Discrepancy: If the unit price on the invoice (£10) is higher than the purchase order (£8), the bookkeeper must investigate. If the invoice has not yet been sent, they correct it. If it has been sent, a sales credit note must be issued for the difference (£2 per unit plus VAT) once authorized.
- Quantity Discrepancy: If the invoice bills for 50 units but the GDN shows only 45 were delivered, the customer was overcharged by 5 units. The bookkeeper must raise a query and issue a credit note for the gross value of the 5 undelivered units.
- Arithmetic Discrepancies: If a calculation error is found on an internal invoice draft, the bookkeeper corrects it. If the customer points out an error on a sent invoice, the business issues a credit note to cancel the incorrect invoice and issues a new, corrected invoice.
Which of the following describes the correct order of documents matching in the credit sales verification process before recording an invoice?
If a credit customer is invoiced for 80 units of a product but the Goods Despatched Note shows that only 75 units were actually delivered, what document should be issued to correct this discrepancy?