Sales and Purchases for ACCA Financial Accounting

What this chapter covers

Sales and purchases: topics in the order to study them

1. 1Sales and Purchases Documentation FlowStart here because every entry in the chapter begins with a document, so you need to know which document leads to which record.
2. 2Books of Prime Entry: Day BooksNext, see where each document is first recorded and which books feed the ledger.
3. 3Sales Tax (VAT) on Sales and PurchasesLearn sales tax before the ledgers, so day book totals split into net, tax and gross correctly.
4. 4Returns, Discounts and Credit NotesOnce the basic flow is clear, add the adjustments that reduce sales and purchases and change the tax.
5. 5Sales and Purchase Ledger Accounts and Control AccountsNow combine everything: postings to individual accounts and the control account that reconciles them.
6. 6Inventory Valuation and Purchases AdjustmentsFinish with inventory and cost of sales, which link purchases to the statement of profit or loss.

How to prepare Sales and purchases

1. Draw the flow from order to payment for both sales and purchases, naming each document and which book records it.
2. Practise posting a short set of invoices, returns and cash into day books, then totalling and posting to the ledger accounts.
3. Learn the sales tax rule: for a registered business, tax on sales is a liability and tax on purchases is recoverable, and the amounts are separate from revenue and expenses.
4. Write the standard layout of a receivables and a payables control account, and practise filling in the missing figure.
5. Do mixed questions on discounts and returns, checking each time whether tax is affected and which accounts change.
6. Calculate inventory at the lower of cost and net realisable value, and practise the cost of sales workings.
7. Finish with timed sets of objective questions, including number entry, and review every wrong answer for the cause.

Common mistakes in Sales and purchases

• Treating sales tax as income or as an expense.

  Fix: Split every invoice into net and tax. Net goes to sales or purchases, and tax goes to the sales tax account.

• Putting the debit and credit on the wrong side of a control account.

  Fix: Remember that receivables increase with credit sales and decrease with cash and returns. The payables account does the opposite in terms of sides.

• Recording trade discount in the ledger.

  Fix: Trade discount is taken off before recording. Only settlement discount needs its own entry.

• Forgetting tax when posting returns and credit notes.

  Fix: A credit note reverses the original entry, so reverse the tax with it.

• Using selling price for inventory instead of the lower of cost and net realisable value.

  Fix: Compare cost with selling price less costs to sell for each item, and take the lower.

• Giving a gross figure when the question asks for net, or the reverse.

  Fix: Underline whether the figure includes tax, then do a quick check before entering the answer.

Last-day revision: Sales and purchases

• ✓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.

Sales and purchases practice questions

• Thorn Co's sales ledger control account at 1 July showed a balance of $42,000 debit. During July: credit sales were $60,000, cash received f…
• Kestrel Ltd returns goods that it bought on credit from Alder Ltd because they were faulty. Which entry does Kestrel Ltd record in its ledge…
• Marlow Co sold goods on credit to a customer for $8,000 plus sales tax at 20%. The customer later returned goods with a net value of $1,500,…
• Which book of prime entry would normally be used to record goods returned to a supplier, before posting to the ledger accounts?
• A customer returns goods that were sold on credit because they were faulty. Which document does the seller issue to reduce the customer's ac…
• Dalton Ltd's sales day book for March shows: invoices net of sales tax $40,000, sales tax at 20% $8,000, total $48,000. Which entry correctl…
• Under the usual bookkeeping approach, how should a prompt payment (settlement) discount that a business takes from a supplier on paying an i…
• Halden Co is registered for sales tax. It buys goods for $4,800 including sales tax at 20%, then returns goods with a gross value of $1,200 …

Sales and purchases in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• CA IntermediateManagement of Payables (Creditors)
• CMA IntermediatePayable Management
• CMA FinalAccounts and Audit
• CS ExecutiveAccounts and Auditors