Business documents are the written and digital records that track every stage of a transaction between buyers and sellers for accountability and tax purposes. In the exam, you need to complete invoice calculations, explain document functions, and extract figures from source documents for financial accounts.
The Commercial Document Trail
Buying and selling follows a set order of documents, so there is written proof of every step. The buyer initiates the purchase, while the seller issues most of the documents.
| Document | Sent by → to | Purpose |
|---|---|---|
| Letter of enquiry | Buyer → Seller | Asks about product availability, prices, and terms. |
| Quotation | Seller → Buyer | States prices, discounts, delivery charges, and terms. |
| Order | Buyer → Seller | Places a formal request for specific goods. |
| Delivery docket | Seller → Buyer | Accompanies the delivery; the buyer checks goods and signs as proof of receipt. |
| Invoice | Seller → Buyer | Bills the customer and sets out credit payment terms. |
| Credit note | Seller → Buyer | Reduces the balance owed for returned, damaged, or overcharged goods. |
| Debit note | Seller → Buyer | Increases the amount owed when the buyer was undercharged on the invoice. |
| Statement of account | Seller → Buyer | Summarises all monthly invoices, payments, and the closing balance. |
| Receipt | Seller → Buyer | Confirms in writing that payment has been received. |
A credit note reduces the bill; a debit note increases it. A business should get at least two quotations so it can compare price, quality and delivery and get the best value for money.
Calculating an Invoice
An invoice acts as a formal bill for goods sold on credit. Calculations must follow this exact order:
- Multiply quantity by unit price for each item to find line totals.
- Add all line totals to find the total excluding VAT.
- Calculate trade discount and subtract it to find the subtotal.
- Add any delivery charge to the subtotal.
- Calculate VAT on that figure at the given rate (usually 23%).
- Add the VAT amount to find the total balance due.
Many invoices have the letters E&OE printed at the bottom. This stands for Errors and Omissions Excepted, which gives the seller the right to correct genuine clerical mistakes.
An invoice also shows: names and addresses of seller and buyer, the date, the invoice number, the order number, the seller's VAT number and VAT rate, and the quantity, description and unit price of each item.
Source Documents for Financial Accounts
Business documents provide the written evidence needed to record entries in the Cash Account and general ledger.
- Sales invoices and cash receipts: Give the figures for sales revenue and the VAT collected on sales.
- Purchase invoices: Give the cost of goods bought for the Purchases Account, and the VAT paid, which goes in the VAT column.
- Rent bills: State the rent charge due for a specific period to record in the Rent Account.
- Payslips: When entering wages into a Cash Account or Wages Account, always record gross pay. Gross pay represents the full wages cost to the employer before tax deductions are taken out.
Electronic Invoicing
Most firms now send invoices electronically, by email or straight from one computer system to another, instead of on paper.
- Faster payment: Invoices arrive instantly, helping sellers get paid sooner and improving cash flow.
- Lower costs: The business saves on paper, printing, envelopes and postage.
- Fewer errors: Automated calculations and digital transfers reduce human mistakes when posting figures into accounts.
Key terms
- Invoice
- A document sent by a seller requesting payment for goods or services supplied on credit.
- Delivery Docket
- A document sent with goods that the buyer signs to confirm they arrived in good condition.
- Credit Note
- A document sent by a seller to reduce the amount owed when goods are returned, damaged, or overcharged.
- Debit Note
- A document sent by a seller to increase the amount owed when a customer has been undercharged.
- Statement of Account
- A monthly summary sent by a seller showing all transactions, payments made, and the remaining balance due.
- Trade Discount
- A percentage price reduction given by one business to another, usually for buying in bulk.
- E&OE
- Errors and Omissions Excepted; a note giving the seller the right to correct genuine clerical errors on an invoice.
Check yourself
Which document does a buyer inspect and sign when a supplier delivers goods?
A delivery docket.
What document does a seller issue to reduce a customer's bill after damaged goods are returned?
A credit note.
What document does a seller issue to increase the amount owed if a customer was undercharged?
A debit note.
Goods total €1,000, trade discount is 10%, and VAT is 23%. What is the VAT amount?
€207.00 (€1,000 − €100 = €900 subtotal; €900 × 0.23 = €207.00).
Give one reason why a purchasing manager should obtain at least two quotations before ordering.
To compare price, quality and delivery terms in order to get the best value for money.