DOCUMENTS IN BUYING AND SELLING OF GOODS
MEANING OF COMMERCIAL DOCUMENTS
Commercial documents are official papers which facilitate the act of buying and selling of goods. All business transactions must be backed by relevant documents in order to show authenticity as well as for record purposes, The various types of commercial documents currently in use are as follows:
- Trade journals.
- Letter of enquiry.
- Catalogue and price list.
- Delivery note.
- Advice note.
- Consignment note.
- Credit note.
- Debit note.
- Statement of account.
- Pro forma invoice.
1) Trade Journals
Trade journals are publications which serve as sources of information to the buyer as it contains articles on matters of interest to people in a particular trade. Trade journals contain information about price, terms of payment, terms of sales and delivery. The description of the goods will also be shown in the journal.
2) Letter of Enquiry
Letter of enquiry is written by the buyer to the producer or supplier asking for information about certain goods which are for sale. The letter will enquire about the terms of sale, payment, delivery and other relevant information before the buyer decides on one particular producer and what to buy The prospective buyer may request for the price lists of the goods. Below is a model letter of enquiry.
Uses of Letter of Enquiry
- Sent by the buyer to the seller to find out about the availability of goods, their prices and the terms of payment.
- It informs the seller of the goods required, the quantity, the time and the terms of delivery.
3) Catalogue and price list
Catalogue: Catalogue is a pictorial presentation of goods and articles available for sale, especially in mail order business. It is a medium of advertising.
Uses of Catalogue
- It is used to inform the buyers of the details of the goods, as to size, colours, prices and delivery terms.
- It can also be used as a quotation or reply to enquiry.
Price List: The price list shows the current prices of the various products of a firm.
Uses of price list
- It is sent by a wholesaler to retailer to inform him of details of goods, such as prices and delivery terms.
- It is used by retailer to compare terms of different wholesalers.
- It also guides the customer in making a choice.
Quotation is a statement prepared by a supplier of goods or services for a particular order which shows the current price and terms of trade.? Quotation is applicable to a particular transaction only. The supplier will send it to show the price to be charged, terms of payment and period of delivery. It is usually sent as a reply to an enquiry. Below is an example of quotation.
An order is a statement sent by the buyer to the seller, stating the full description and quantity of goods required. After the buyer has gone through the catalogue, he will then place an order. The order will show the goods required, the quantity, type, conditions of payment, purchases and method of delivery as reflected in the sample on the next page.
Invoice is a commercial document used in business transaction, giving a complete or comprehensive summary of a transaction involving sales or purchases of goods. Most invoice bears the term E & OE (Errors and Omissions Expected). It is sent by the seller to the buyer to provide him the following information:
- List of goods bought and description.
- Quantity of each purchase and price.
- Charges for packing.
- Means of transport.
- Terms of delivery and payment.
- Total amount expected from buyer after discount.
- Discount granted.
- Name and address of suppliers.
Uses of Invoice
- It is document showing details of goods sold.
- It serves as a receipt.
- It is used to write up the purchases / sales journals.
7) Delivery Note
Delivery note is a document which usually accompanies the delivery of goods. It provides the buyer with the list of items in a particular consignment. It enables the goods to be checked by the buyer and to ensure they are delivered in good condition, especially when goods are delivered through the seller’s means of transportation. Delivery note, like the one below, is usually sent by the seller to the buyer for signature. When the buyer receives the goods, if they are correct, the buyer signs and retains one copy and return the other copy.
Uses of Delivery note
- It is used to confirm the goods on arrival before it is filed for reference.
- It is used as evidence of delivery.
- It is used when goods are transported by the wholesaler’s means of transport.
8) Advice Note
Advice note is a document sent by the supplier to the buyer, informing him of the date on which the listed goods were dispatched and the means of transportation employed. It is normally sent to reach the purchaser ahead of the goods which are sent through the rail. Advice note will provide information on when and where to expect the goods sent.
Uses of Advice note
- It is used to inform the buyer that his goods are on the way.
- It is used to show the mode of transport used.
- It is used to inform the consignee of the likely time the goods would arrive.
9) Consignment Note
Consignment note is a document supplied to a carrier when goods are to be sent from one place to another. It gives details of the goods, number of packages, weight, name and address of the sender and consignee. The document after being completed by the sender is handed over to the carrier and signed by the consignee on the delivery of the goods, thus providing proof of delivery.
Uses of Consignment Note
- It is used when the wholesaler engages an independent transporter to convey the goods to the retailer.
- It is used to show details of goods sent.
- It is also used as evidence of delivery when duly signed by consignee.
10) Credit Note
Credit note is a document sent by the seller to the buyer to correct an overcharge. It arises because some goods which had been charged were returned as damaged or not as ordered. Hence, Credit note is sent to a customer for reduction in the amount owed by him. To avoid confusion, it is usually printed in red.
Uses of Credit Note
- Sent by the seller to correct an overcharge on an invoice.
- Sent when the buyer has returned some faulty goods to the seller.
- Sent when the seller has decided to give an allowance to the buyer.
11) Debit Note
Debit note is a document sent by the seller to the buyer to correct an undercharge or when goods are not charged on the invoice. It is also referred to as supplementary invoice. Debit note is sent to the customer to increase the amount of charges on the invoice, hence increasing his indebtedness.
Uses of Debit Note
- Debit note is used to correct an undercharge.
- It is used when the invoice is not well priced.
- It is also used when some items despatched have not been documented in the original invoice.
- It informs the buyer that his account has been debited.
12) Statement of Account
Statement of account is a document sent by the seller to the buyer at regular intervals to inform him of all transactions made during a particular period and the amount due. It usually shows credits and debits to the account and the balance due.
Uses of Statement of Account
- It enables the customer of a firm to have a thorough check of what he has purchased.
- It also gives the customer an idea as to his financial standing at a given period.
- The information in it is used by bank customer to prepare a bank reconciliation statement.
- The customer can use it to check the accuracy of the entries.
- It shows the balance due for payment.
- It shows the amount of goods bought and payment made.
- It is a request to pay.
- It draws attention to accounts which are overdue.
13) Pro forma Invoice
A pro forma invoice is an invoice that is usually submitted before goods are despatched as a polite request for payment to be made in advance when a seller is not willing to sell on credit and to show the goods. If the goods are retained, it becomes an ordinary invoice.
Uses of Pro forma Invoice
- It is used to serve as a quotation.
- It is used when goods are sent on approval to a customer.
- It is used when dealing with a customer for the first time, as a polite way of refusing credit.
- It is used as a reply to enquiries.
- It is used when goods are sent to an agent to be sold.
- It states the terms of sale.
- It is used in foreign trade when goods are exported on consignment, stating the price of goods.
Differences between ordinary invoice and pro forma invoice
- Ordinary invoice is used as an evidence of credit sale while proforma is used when the seller did not want to sell on credit.
- Ordinary invoice is always sent with the goods while proforma invoice can be sent without the goods.
- Ordinary invoice is not used to provide information but to confirm sales while proforma invoice can be used when the buyer needs information from the seller on terms of sales.
Receipt is a document which acknowledges that payment has been received from the buyer. When the customer receives the goods and he sends the money to the seller who in turn issues the receipt as evidence of payment. It must be written and signed by the seller and sent to the buyer, stating the actual amount received.
Uses of receipts
- It serves as evidence of payment.
- It states the actual amount received and who received it.
- It shows the date of payment.
- Receipt is used for auditing purposes.
Sample of Receipt
TRADE TERMS AND ABBREVIATIONS
Trade terms are the various terms and abbreviations commonly used in Commerce. These are:
1) Discount: Discount can be defined as the reduction in the price of goods to encourage bulk purchases and prompt payment. A discount decreases the amount someone pays when buying goods.
Types of Discount
- Cash Discount: Cash discount is an allowance given to a customer to encourage payments for goods and services within a stipulated period of time. It is a reduction given by a creditor to his customer on an account paid before a specified date to ensure prompt payment. For example, when there is 5 1/2% cash discount, it means that a 5 1/2% discount would be allowed on settlement of account, if the buyer pays cash within a specified period.
- Seasonal Discount: Seasonal discount is a price reduction given by a producer to a buyer who is willing to order, receive and pay for goods during the off season or in advance of selling season, e.g. a retailer will be granted a seasonal discount on Christmas goods. For example, when there is Net 2 month, it means there would be no discount to be given after two months. The buyer would pay the invoiced amount if payment is made after two months. It allows credit purchase.
- Quantity Discount: Quantity discount is offered by the supplier to retailers as an inducement to buy large quantities of goods in a single order. Large order quantities can help to reduce the supplier’s selling, handling, transportation and inventory cost. Quantity discount represents an additional way to reduce the price of goods.
- Trade Discount: Trade discount is a basic discount given to a middleman as an inducement or rebate for performing certain functions in the channel of distribution and to cover his operating costs and profit. Trade discount is also referred to as functional discount. It is a deduction in the standard price or catalogue price of goods on sale to provide for the retailer’s gross profit margin. Trade discount is based on a quoted retail price. For example, when there is 6% Trade discount, it implies that 6% trade discount would be given to the customer when he buys in large quantity. This is a reduction on catalogue price so as to allow the seller’s mark up.
Reasons for Granting Discount
- Discount is usually given to attract more customers.
- Cash discount is granted to encourage prompt payment within a stipulated time.
- Discount is given as an inducement to encourage bulk purchase.
- It is given to provide for the retailer’s profit margin.
- Discount is also granted to reduce risk of debts that cannot be recovered.
- Granting of discount reduces the risk of tying down the capital of the business.
2) Carriage Forward: Carriage forward signifies that the buyer is responsible for the payment of carriage when he receives the good dispatched by the seller. It means that the price quoted on an invoice does not include carriage charges.
3) Carriage Paid: Carriage paid is a price quotation for goods in which the seller bears all delivery and transportation charges.
4) Ex-warehouse: Ex-warehouse is a quotation of price of a commodity which exclude all delivery charges. The buyer is responsible for delivery expenses from the seller’s warehouse.
5) Ex-works: Ex-works term means that the buyer is responsible for all delivery charges except loading onto the road or rail vehicle for which the seller is responsible.
7) Loco: Loco is a term used in foreign trade to denote price of goods at the warehouse of the exporter. If an importer is buying goods based on loco price, he will have to pay all charges of transportation, freight, insurance and shipping the goods to his own warehouse.
8) E&OE (Errors and Omissions Excepted): It simply means that the supplier has the right to make any necessary correction, if it is discovered later that the invoice contains errors or omissions.
TERMS OF SALE
1) Cash Sale
Cash sale involves the transfer of property or goods from the seller to the buyer on cash basis. Cash will be paid immediately for goods sold to customers.
Types of Cash Sale
- Prompt Cash: Prompt cash is a term of payment in which the buyer is expected to pay for the goods purchased within a few days.
- Spot Cash: Spot cash is a term of payment in which the buyer pays cash immediately for goods bought before he takes them away.
- Cash With Order (C.W.O.): Under this system, the buyer must enclose the money when the order is placed. If the money is not included, the contract will not be honoured. This is common in mail order business.
- Cash on Delivery (C.O.D.): Cash on delivery is a term of payment in which the purchaser is expected to pay for the goods through the post master immediately they are delivered to him. This is a service provided by the post office and is common in mail order business.
2) Credit Sale
Credit sale occurs when ownership and possession is transferred to the buyer by the seller without immediate payment.