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Chapter 5 Sales

The document discusses sales invoices, including their purpose, content, and accounting treatment. It also covers credit notes, statements of account, and sales tax principles and calculations as they relate to sales.

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Waleed Nasir
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47 views26 pages

Chapter 5 Sales

The document discusses sales invoices, including their purpose, content, and accounting treatment. It also covers credit notes, statements of account, and sales tax principles and calculations as they relate to sales.

Uploaded by

Waleed Nasir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 5

Sales and Sales Recording


Purpose of Sale Invoice

 One copy is sent to the customer as a reminder to pay


 One or more copy copies are kept by the seller

From the seller’s point of view:


1. It is record of the amount owed by the customer.
2. It will be used as source document to enter sales in the accounting
record.
From the customer’s point of view:

1. It is record of the amount owed to the seller


2. Reminder to pay for goods purchase.
3. Source document to enter purchases.

Copies of Sale Invoices:


1. Accounts Department / Store Department
2. Sales Department
When are Sales Invoices Produced?

Sales invoice issued when risk and rewards relating to goods transferred to
customer e.g. when GRN received.

Additional points:
 When an invoice is for providing service, the invoice is usually sent out to
the customer after the service has been provided.
 In some cases invoice might be sent out before the goods or services are
provided. e.g. Rental agreement
Content of a Sales Invoice

1. Customer name and address


2. Name of your business , business address and telephone number
3. Invoice number
4. Invoice date
5. Customer account number and reference
6. Details of the goods or services supplied
7. Trade discount
8. Find total value
9. Settlement terms
10. Sale tax registration number
11. Tax point
Settlement Terms

 Net 30 days (credit period)


If settlement is sated as ‘net 30 days’ this means that, in the absence of an
offer of any settlement discount, the invoice should be paid within 30days of
the invoice date.
 E & OE (error and omission)
The term ‘E & OE’, if it appears on an invoice, stand for error and omissions
expected . This means that the seller reserves the right to amend any error that
is subsequently found on the invoice.
 Ex works:
Sale invoice might include the term ‘ex work’ . This means that the price
quoted does not include the cost of delivery of the goods.
Double Entry for Sales record

At the time of Sale:


 Dr: Receivables /Cash a/c
 Cr: Sale/Revenue a/c

When payment received:


Dr. Cash a/c
Cr. Receivable a/c
Purpose of Credit Notes

After sending invoice if sale amount needed to reduce.

A credit note will be required if the following circumstances when an invoice has already been sent
out to the customer.
 When customer return goods.
 They are faulty / damaged
 Not as per requirement
 An error correction made in invoice
 Seller treated as sale return

Double entry for sale return:


Dr. Sale return/ Return inwards
Cr. Receivables a/c
Statement of Account

Send by seller to customer periodically showing balance of particular client.

a) Reveals Opening Balances


b) Invoice Send
c) Credit Note
d) Discount Allowed
e) Closing Balance
Tax

Tax is only recorded at the time of sale and purchase and when payment is
made or reclaimed by HRMC not when payment is received or paid from
customer or supplier.
Principles of Sales Tax

 Sales tax is a form of indirect taxation.


 Business that is registered for sales tax is essentially a collection agent for
Government.
 Sales tax is paid on purchases is called as input tax and sales tax charged on
sales is called an output tax.
 Sales tax is excluded from the reported sales and purchases of business.
 Periodically business pays the Sales tax to tax authorities.
 If output tax exceeds input tax, business pays the excess to tax authorities.
 Output tax is current liability of business payable to tax authorities.
 If input tax exceeds output tax, business is repaid the excess by tax authorities.
 Sales tax is charged on most goods and services.
Standard rate of sales tax

 Standard rate of sales tax is 17.5% or 20%.


 Tax exempted firms
 Zero rated firms
 Sales tax registered firms
Calculation of Sales Tax

 Net selling price(tax exclusive price) 100.0%


 Sales Tax 17.5%
 Gross Selling price(tax inclusive price) 117.5%
 Net selling price is amount that business wishes to achieve.
 Gross selling price is price charged to customers.
 Difference is paid to tax authorities
Sales tax and settlement discount

 According to sales tax rule, amount of sales tax payable should be


calculated on assumption that settlement discount will be accepted by
customer.
 Sales tax is calculated at 17.5% of the invioce sub-total less amount of
settlement discount.
Sales tax requirement(Sales tax
invoice)
 Is a business is sales tax registered, then it must charge sales tax on its sales
and must issue a sales tax invoice.
 To be a valid invoice, certain information must be included on invoice.
Sales tax registration number

 All sales tax registered business will have a unique sales tax registration
number.
 Requirement to put this number on sales tax invoice enables tax authorities
to determine whether the invoice came from a valid sales tax registered
number.
Tax point

 Tax point on an invoice is date when transaction is deemed to have taken


place for sales tax purpose.
 It enables sales tax on transaction to be recorded in correct sales tax
period.
 There are quite complex tax point rules, but usually tax point is the invoice
date.
Rate of sales tax

 Rate of sales tax on an invoice must be shown.


 Three sales tax are currently standard rate 17.5%, Reduced rate 5%and zero
rates 0%.
Accounting for sales tax

 Sales tax registered business will need a sales tax ledger account.
 This may be a receivable or a payable account depending on
circumstances
Sales tax on sales

 Dr Receivable ledger control account Sales Tax Inclusive price


 Cr Sales Sales Tax Exclusive Amount
 Cr Sales Tax account Sales Tax

Sales Return:
Dr Sales Return
Dr Sale Tax
Cr Receivable
Sales tax on purchases/expenses

 Dr: Purchases/Expenses Sales tax Exclusive amount


 Dr: Sales tax account Sales tax
 Cr: Payables ledger control account Sales tax Inclusive amount

Purchases Return:
 Dr payables
 Cr Purchases
 Cr Purchases Return
Age Analysis

 There needs to be a way of knowing whether some of the invoices are long
overdue so that those invoices can be followed up with the customer.
 Since a business carries out transaction with a large number of accounts, it
becomes tiresome and pain staking to investigate each account
individually and spotting their records. Hence , it is advisable to prepare a
single schedule that summarizes the age of the item in several accounts.
 This is achieved by what is called an age analysis of receivables.
 An age analysis of receivable breaks down the customer balances on the
sale ledger into different period of outstanding debt.
Age Debt Analysis Report:

It is a report showing amounts owed by each credit customer (Receivables)


in term of the time that each debt has been outstanding.

Purpose:
▪ Control over credit period
▪ Potential irrecoverable debts
▪ Payment pattern of receivables
How is the age analysis used?

Age analysis of receivables may be used to help decide what action to take
about older debts.
Performance of our credit control department can be checked, once the
debt situation is known/may result in improved debt collection.
Information about credit limit becomes easily available
Irrecoverable debts:

 Some of the customers appearing on the ledger might not be able to pay
off the amount they owe to the business, due to following reasons:
 Bankruptcy
 Out of Business
 Dishonesty

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