ACCA Applied Knowledge · Financial Accounting

Sales and purchases: formula sheet

Full chapter guide

Key formulas

Sales invoice entry: Dr Receivables (gross) ; Cr Sales (net) ; Cr Sales tax payable; Posted from the sales day book. Gross = net + sales tax.
Purchase invoice entry: Dr Purchases (net) ; Dr Sales tax recoverable ; Cr Payables (gross); Posted from the purchases day book. Assumes the tax is recoverable.
Credit note issued (sales return): Dr Sales returns (net) ; Dr Sales tax ; Cr Receivables (gross); Posted from the sales returns day book. It reduces the customer's balance.
Credit note received (purchase return): Dr Payables (gross) ; Cr Purchase returns (net) ; Cr Sales tax recoverable; Posted from the purchases returns day book.
Statement balance: Closing balance = opening balance + invoices − credit notes − payments; Use to reconcile a supplier statement to your payables ledger.
Documents that create entries: Invoice and credit note = entry ; order, delivery note, GRN = no entry; Orders and delivery notes are not recorded in the ledgers.
Sales day book posting: Dr Receivables control account (gross total); Cr Sales (net total); Cr Sales tax (tax total); The individual invoice gross amounts are also debited to each customer's account in the receivables ledger.
Purchases day book posting: Dr Purchases (net total); Dr Sales tax (tax total); Cr Payables control account (gross total); Each supplier's account in the payables ledger is credited with the gross invoice amount.
Sales returns day book posting: Dr Sales returns (net total); Dr Sales tax (tax total); Cr Receivables control account (gross total); Each customer's account is credited with the gross credit note.
Purchases returns day book posting: Dr Payables control account (gross total); Cr Purchases returns (net total); Cr Sales tax (tax total); Each supplier's account is debited with the gross credit note.
Gross amount: Gross = Net + Sales tax; Sales tax is a percentage of the net amount. At 20%, tax = net × 20%.
Tax on a net amount: Sales tax = Net amount × tax rate; Use when the invoice amount is stated excluding tax.
Net to gross: Gross = Net × (1 + rate); For a 20% rate, Gross = Net × 1.2.
Gross to net: Net = Gross ÷ (1 + rate); Tax = Gross − Net, or Gross × rate ÷ (1 + rate). With a 20% rate, tax is 1/6 of gross.
Credit sale entry: Dr Receivables (gross); Cr Sales (net); Cr Sales tax (tax); Output tax is a liability to the authority.
Credit purchase entry: Dr Purchases (net); Dr Sales tax (tax); Cr Payables (gross); Input tax is recoverable, so it is debited to the sales tax account.
Sales tax account balance: Output tax (credits) − Input tax (debits); Positive means a liability owed. Negative means a receivable recoverable.
Payment to authority: Dr Sales tax; Cr Bank; Clears the liability. A refund received is Dr Bank; Cr Sales tax.
Trade discount: Net price = List price − (List price × trade discount %); No ledger entry for the discount. Record the sale or purchase at the net price.
Settlement discount amount: Discount = Invoice amount outstanding × discount %; Apply it to the amount the customer is paying. Where sales tax is involved, follow the question's instruction on the base.
Sales return entry (seller): Dr Sales returns; Cr Receivables (control account); Posted from the credit note issued. Sales tax, if any, is debited to the sales tax account as well.
Purchases return entry (buyer): Dr Payables (control account); Cr Purchases returns; Posted from the credit note received.
Discount allowed (seller): Dr Cash/bank; Dr Discount allowed; Cr Receivables; Discount allowed is an expense in profit or loss.
Discount received (buyer): Dr Payables; Cr Bank; Cr Discount received; Discount received is income in profit or loss.
Net sales: Net sales = Sales − Sales returns; Net purchases = Purchases − Purchases returns.
Cost of sales: Opening inventory + Purchases + Carriage inwards − Returns outwards − Closing inventory; Purchases should be net of trade discounts. Carriage outwards is excluded.
Inventory valuation rule (IAS 2): Carrying amount = lower of cost and net realisable value; Apply per item or group of similar items, not to total inventory.
Net realisable value: NRV = Estimated selling price − Costs to complete − Selling costs; Selling costs include items such as commission and packaging needed to make the sale.
Gross profit: Gross profit = Revenue − Cost of sales; Errors in closing inventory change gross profit by the same amount.
AVCO unit cost: Weighted average cost per unit = Total cost of units held ÷ Total units held; Recalculate after each purchase if using the perpetual method.
Inventory error effect: Closing inventory overstated → cost of sales understated → profit overstated; The same error reverses next year as opening inventory.

Quick revision

Order, delivery note, invoice, credit note and statement each have a different purpose.
A credit sale: debit receivables, credit sales and credit sales tax.
A credit purchase: debit purchases and sales tax recoverable, credit payables.
Day books are books of prime entry, and their totals are posted to the ledger.
A control account is a total account that should agree to the list of individual balances.
Sales returns reduce sales and receivables; purchase returns reduce purchases and payables.
A credit note reverses part or all of an invoice, including the tax.
Trade discount is deducted from the invoice price and is never recorded separately.
Settlement discount allowed or received is recorded when the discount is taken.
Inventory is valued at the lower of cost and net realisable value.
Cost of sales = opening inventory + purchases − closing inventory.
Read whether a figure includes tax before you calculate.

Common mistakes

Recording a purchase order or delivery note in the ledgers. Fix: Remember only invoices and credit notes change the amount owed. Orders and delivery notes are not recorded.
Confusing a debit note with a credit note. Fix: A debit note is the buyer's request to cancel or reduce an invoice. A credit note is the seller's confirmation that reduces the receivable.
Recording cash sales in the sales day book. Fix: Day books hold credit transactions only. Cash sales go straight to the cash book.
Posting the net amount to the receivables or payables control account. Fix: Always post the gross total to the control account and the net and tax to their own accounts.
Recording sales or purchases at the gross amount. Fix: Post only the net amount to sales or purchases. Gross goes to receivables or payables.
Treating sales tax as income or an expense. Fix: Put all recoverable tax in the sales tax account only. It never reaches profit or loss.
Recording a trade discount as a separate ledger entry. Fix: Trade discount is deducted from the price before recording. Only settlement discounts get discount allowed or received entries.
Recording a settlement discount when it was only offered. Fix: Enter the discount only if the customer paid in time or the question says it was taken.
Including carriage outwards in cost of sales Fix: Ask who is being delivered to. Delivery to you (inwards) is cost of sales. Delivery to customers (outwards) is a distribution expense.
Comparing total cost with total NRV Fix: Compare each item or group of similar items. A gain on one item cannot offset a loss on another.

Exam tips

Learn the document order for both cycles. Many questions ask what comes next or which document is missing.
Expect multiple choice that asks which document does not lead to an entry. The answer is usually an order or delivery note.
For multiple response questions, read how many options you must select and tick exactly that number.
In number entry questions, check whether the figure asked for is net, tax or gross before you calculate.
In statement questions, look for credit notes or payments in transit as the usual reconciling items.
Read each question for the words 'credit', 'invoice' and 'credit note'. They tell you which day book applies.
In multiple response questions, select exactly the number of options asked. Eliminate any option that places a cash transaction in a day book.
In number entry questions, check whether you need the net, tax or gross figure before you type.