In the previous section we looked at how organisations arrange for goods to be transferred and also how they protect themselves in the event of future disputes. Once goods have been ordered and delivered, the next step in the process is for the selling company to send an invoice, which is in effect a request for payment.
In a traditional manual system the selling company will use the information from the delivery note (goods, amount, date, customer details) to prepare the invoice. However delivery notes do not contain information about the prices which will be charged. This is obtained from the order which was created at the start of the process. Price, any discounts and Value Added Tax (VAT) are stated on the sales invoice.
Sales invoices will contain a unique sequential number to identify them within the accounting records and system of the selling organisation. Many organisations now use computer based systems which will automatically generate the sales invoice, (with all the relevant details) at the same time that it produces a delivery note.
Organisation will very often have standard prices for goods, but will be willing to negotiate reductions on these prices for certain bigger customers. These reductions are called trade discounts. This would be detailed on the face of the invoice to let the customer know what reduction they are receiving.
It would also usually state on the invoice when the organisation is expecting to be paid for the goods (very often this would be 30 days from the date of the invoice), and also how they are expecting to be paid. They could also offer a discount on the stated amount if the customer pays earlier than expected (This is called the settlement discount). The date which an invoice is created is called its ‘tax point’. This is the date that decides which week, month or year a sale is to be reported in.
Below is a sales invoice using the information from the delivery note which we looked at in the last section.
UK VAT is currently set at 20% by the government. The customer is also told that they take 2.5% off the balance (£3.43) should they pay the amount early. The fact that the organisation has given the seller their bank details would indicate that this is how they would prefer to be paid.
Sometime there are errors when the invoice is created, in either price or quantity. This could happen if the invoice was created the same time as the delivery note (i.e before it was checked by the customer). Also the customer could find a fault with the goods afterwards, or have an agreement whereby they can send back any which are unsold.
If any of these are the case then the amount which has been billed on the invoice is no longer the amount that is due. Should there be any reason why the amount on the sales invoice is incorrect then the customer will expect a credit note to be issued. A credit note is in essence a negative invoice, which will reduce the total amount which is payable by the customer.
Sometimes in bigger companies when an error is found it is the customer who will raise paperwork to send to the seller to inform them of the error and request for a credit note to be issued. This is called a debit note. It is the customer saying there is an error and they would like to not have to pay the full amount. Smaller companies would normally contact the company and request the amount verbally.
In the example above, the customer had an agreement whereby they bought 25 sheets but were told that if they did not use some they could return them. Lets say the customer did that and returned 6 off the items. The credit note would look like this.
This would mean that the customer would now owe £104.20 (£137.10-£32.90). Before any settlement discount. It is not uncommon to see credit notes printed in red in order to ensure people realise that they are not invoices. All that remains now is for the customer to pay.