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Business documents for a credit transaction
The video will detail the various stages in a credit transaction.
Selling goods on credit always involves an element of risk. The goods are taken away or delivered to the customer now with the promise of payment in the future, so your business must be confident that the payment will be received.
In the video, the Kaplan tutor takes you through the process of a credit sale.
If you wish to use them, all of the documents mentioned in the video can be found in the Downloads section at the end.
Offering credit
The decision process as to whether or not to make the sale on credit will be different depending upon whether this is a sale to an existing credit customer or a new customer.
Existing customers
If an existing credit customer wishes to make a further purchase on credit, it would be normal practice to carry out some basic checks:
- When the customer was originally accepted as a credit customer, a credit limit will have been set which should not be exceeded. Checks should be made to ensure that the new sale, when added to the amount currently owing, does not take the customer over their credit limit.
- It would also be sensible to check that there have been no problems recently with receiving payment from this customer. If the checks are satisfactory then the credit sale can go ahead.
New customer
The first time a new customer wishes to make a credit purchase a different set of checks should be carried out:
- If a new customer asks for credit from your business then it would be normal practice to ask the customer to supply some trade references – names of other businesses that they trade with on credit that can vouch for their creditworthiness.
- Your business may also wish to check the customer’s creditworthiness through an agency, or by asking for references from the customer’s bank.
If the references and checks are satisfactory then a credit limit will be set for this customer and the sale can go ahead.
Price enquiry
The first stage of the process for a credit sale may be the receipt of a price enquiry from a customer.
The price enquiry may be a formal written document, an email enquiry or a telephone call. When responding to a price enquiry it is important that you make sure that the price you quote is the correct one as if it is incorrect you may find that you are contracted to sell the goods at that price under contract law.
Price quotation
It is common practice to quote prices on a website if there is a standard price list from which there are no variations. However, some businesses will be prepared to offer certain customers goods at different prices or offer a discount. Therefore it is often the case that a price quotation is sent out to a customer showing the price at which the goods wanted can be bought.
The price quotation is an important document as this is the price that your organisation is now contracted to sell the goods at. Therefore it is important that it is authorised by an appropriate person in the organisation.
Different types of discounts allowed or offered to customers will be considered in Course 2 – Accounting transactions further considerations.
Remember, if you wish you can find a PDF copy of a price quotation in the Downloads section at the end.
A purchase order
This is a buyer-generated document that authorises a purchase transaction.
If the customer is happy with the price quotation that they have received from a business then they will place a firm order with the business. The order may be by telephone, email, fax or it may be in writing. Whichever method is used for the purchase order, it is important to check all of the details carefully.
- Does the price agree to what was quoted to the customer?
- Are the delivery terms acceptable?
- Are any discounts applicable?
Note that the purchase order has been authorised by an appropriate person in the customer’s organisation.
If you wish, you can find a typical purchase order can be found in the Downloads section at the end.
A sales order
This is a seller-generated document that authorises a sale to a customer, issued after the receipt of a purchase order.
To avoid misunderstandings, a supplier will normally confirm a customer’s order by completing a sales order, even if the customer has already sent a written purchase order. A sales order confirms the terms on which goods will be sold including:
- quantity and type of goods or service
- date of supply
- delivery address
- price and payment terms including any discounts given or offered.
If you wish, you can find a sales order in the Downloads section at the end.
Delivery note
This is a document accompanying the goods dispatched to a customer explaining what the delivery contains.
Delivery notes should have sequential numbers that are either pre-printed for a manual system or computer generated in a computer system, and should be used in order. Spoiled or scrapped delivery notes should be cancelled and retained.
There will normally be three parts to a delivery note:
- This is kept by the customer in order to compare to the purchase order and then to the sales invoice.
- This is signed and returned to the supplier of the goods as evidence that the goods have been received by the customer in good condition.
- This is signed and kept by the delivery organisation such as a courier, as evidence that they have delivered the goods and that the customer has received them.
If you wish, you can find a copy of a delivery note in the Downloads section at the end.
Goods received note
A goods received note is an internal document completed by the purchaser that records the details of goods received and contains similar information to a delivery note.
The goods received note is often compared to the purchase order as part of a payment authorisation process. The information that a goods received note contains includes:
- supplier name
- quantity and type of goods or service
- the associated purchase order reference and delivery note number
- the name and reference of the carrier for delivery (if different from the supplier).
This article is from the online course:
Introduction to Accounting and the Accounting System
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Introduction to Accounting and the Accounting System
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