For the purposes of the FA1, FA2 and FFA/FA exams, it is assumed that every entity uses a computerised accounting system and that the sales and purchases systems are integrated into the accounting system.
This means that the sales and purchases are not recorded on a separate system and then manually input to the accounting system. Instead, whenever an entity recognises a sale or a purchase, various records will be automatically updated, simultaneously. In this article, we will explore a simple sale/purchase transaction and consider how the accounting records would be updated for each entity in the transaction.
For the purposes of this article, we will ignore sales tax and any brought forward balances that may exist due to trading in the prior year. We will also not consider how the ledger accounts are ‘balanced off’ and will, instead, focus on the initial recording of the sale/purchase and subsequent receipt/payment.
How are sales and purchases recorded
In this scenario, Farida is a sole trader who designs and manufactures accessories for pets. These include products such as collars, feeding bowls, toys and harnesses.
Farida does not sell to the public but, instead, she sells her products exclusively to other businesses such as pet shops and supermarkets.
Pierre is another sole trader. He runs a small pet shop and is one of Farida’s regular customers.
On 1 January 20X1, Pierre used Farida’s website to place an order for 100 dog collars at a cost of $5 per collar. This is Farida’s first sale of the new year but Pierre has been a longstanding customer and she allows him credit terms of 60 days.
First, we will consider the transaction from Farida’s perspective and the impact on her entity’s accounting records before we consider how Pierre would record the purchase for his entity.
The sale – Farida’s accounting records
When Farida received the order, she arranged for the goods to be posted for same-day delivery along with a delivery note which included the number of collars ordered, the date of the delivery and the address which Pierre had requested the goods be sent to.
Once the delivery was made and Pierre received the goods, Farida generated a sales invoice in her accounting system to request payment from Pierre. Through generating the sales invoice, Farida’s accounting system did two things:
- Produced a sales invoice in a format which Farida could then email or post to Pierre, and
- Updated the accounting records to reflect that the sale to Pierre had been made and amounts were now due from him
1. The sales invoice
The sales invoice that Farida created may have looked something like this: