A business document is a written record which gives evidence to a stage in the transfer of goods or provision of services from one party or it is written record which gives evidence that trader or a business transaction has taken place.
A business transaction is a deal between two or more people involving exchange of goods and services in terms of money.
Business transaction may take place on cash basis; in which case goods are paid for before or on delivery or a short while after delivery
Business transaction may also take place on credit basis; which means payment is made after a specified period from the date of delivery of the goods or the provision of the services
There are various business documents that are used in various stages of business transactions as discussed below;
Documents used at the inquiry stage
This is the first stage in transaction. An inquiry is a request by a prospective buyer for information on available goods and services. It is aimed at establishing the following;
- Whether the goods or services required are available for sale
- The quality or nature of the products available
- The prices at which the goods or services are being sold
- The terms of sale in respect to payment and delivery of goods or services
Some of the documents used at this stage include;
Letter of inquiry;
This is a letter written by a potential buyer to the seller to find out the goods and services offered by the seller.
A letter of inquiry can be general or specific. A specific letter of inquiry seeks for information about a particular product.
Reply to an inquiry
The seller may reply to the letter of inquiry by sending any of the following documents;
-Price list -A catalogue -Quotation -A tender
i) A price list
This is a list of items sold by the trader together with their prices. The information contained in a price list is usually brief and not illustrated and may include;
–Name and address of the seller -List of the goods and services
-The recommended unit prices of the products -Any discounts offered
Price list show the prices of the commodities at that time.
A catalogue; A catalogue is a basket which briefly describes the goods a seller stocks.
It is normally sent by the seller to the buyer when the buyer sends a general letter of inquiry. It usually carries illustrations on the goods stocked, and could be in the form of attractive and colorful pictures
The content of a catalogue includes the following;
- Name and address of the seller
- Details of the products to be sold; inform of pictures and illustrations
- The prices of the products
- After-sales services offered by the seller
- Packaging and posting expenses to be incurred
- Delivery services to be used
- Terms of sale
-Catalogues carry more information than the price list and they are more expensive to print.
- Quotation; This is a document sent by a seller to a buyer in response to a specific letter of inquiry. It specifies the conditions and terms under which the seller is willing to supply the specified goods and services to the buyer.
The content of a quotation includes the following;
-Name and address of seller -Name and address of the buyer
-Description of goods to be supplied -Prices of the commodities
-Terms of sale i.e. discounts, time of supply, delivery
-Total of the goods to be supplied
Quotations are normally in form of letters, but many large-scale businesses have pre-printed quotations forms which they readily send to the potential customers.
A Tender
This is a document of offer to sell sent by a seller to a buyer in response to an advertised request
Tenders contain the following;
–Date when the tender advertisement was made –Mode of payment
-Date of making document –Discounts given
–Name and address of prospective seller called the tenderer
–The prices at which the goods can be provided
–Period of delivery –Mode of delivery
-Tenders are delivered in sealed envelopes which are opened by the buyer on a specified date
The winning tender is usually awarded on the of the lowest quoted price although the buyer is not obliged to accept this especially if quality is likely to be low
Tenders are not binding unless accepted by the buyer.
Documents used at the order stage
After receiving replies to inquiry in form of price list, catalogue or Quotation, a prospective buyer will study the terms and conditions stated in them, and then may decide to buy products or not.
An Order
If a prospective buyer decides to purchase an item(s), he or she then places an order
An order is a document sent by a potential buyer to a seller requesting to be provided with specified products under specified terms and conditions
-An order issued for goods is called a local purchase order (LPO)
An order issued for services is called a local service order (LSO)
Ways of making an order
- Filling an order form. This is a pre-printed document that is used for making orders
- Writing an order letter
- Sending an e-mail, faxing or sending a short text message
Giving a verbal order. Verbal orders have the disadvantage in that they can be misunderstood and there would be no record of items ordered
-Where written orders are made, the potential buyer keeps a copy of the order for use in verifying the goods ordered when they are delivered.
–A written order may contain the following;
- Name and address of the buyer
- Name and address of the seller
- The number of the order
- Quantities ordered and total amount to be paid
- Description of the goods ordered
- Price per item
- Special instructions on such matters as packaging and delivery
- Acknowledgement note
On receiving the order, the seller sends the buyer an acknowledgement note
An acknowledgement note is a document sent by the seller to the prospective buyer to inform him/her that the order has been received and it is being acted upon.
After sending the acknowledgement note, the seller has to decide whether to extend credit to the buyer or not. At this stage, the seller has the following options;
- If the seller is convinced that the buyer is credit worthy, arrangements are made to deliver the ordered goods or services to the buyer.
- If the seller is not sure of credit worthiness of the buyer, a credit status inquiry can be issued to the buyer’s bankers or to other suppliers who deal with the buyer to ascertain the credit worthiness.
- If the buyer is not credit worthy then a polite note or a pro forma invoice can be sent to him/her
A proforma invoice
This is a document sent by the seller to the buyer requesting the buyer to make payment for goods or services before they are delivered. It indicates that the seller is not willing to grant the buyer credit
Functions of a proforma invoice
- A polite way of asking for payment before the goods are delivered
- Sent when the seller does not want to give credit
- Used by importers to get customers clearance before goods are delivered
- Issued to an agent who sells goods on behalf of the seller
- Show what the buyer would have to pay if the order is approved
- Can be used to serve as a quotation
Circumstances under which a pro-forma invoice may be used
- If the seller does not want to give credit
- If the seller wants to sell goods through an agent
- If the seller wants to get clearance for imported goods
- If the seller wants it to function as a quotation
- If the seller wants to inform the buyer what he/she pay if the order is approved e.t.c
Documents used at the Delivery stage
After the seller has accepted the order sent an acknowledgement note and where necessary the pro-forma invoice, the seller then prepares the goods for delivery to the buyer. This can be done in the following ways;
- The seller can ask the buyer to collect the goods
- The seller can deliver the goods to the buyer using his/her own means of transport
- The goods can be delivered to the buyer through public transport
- The services(s) can be rendered to the buyer at the sellers or the buyer’s premises or at any convenient place.
The main documents that are used at this stage are;
- Packing note; Before delivery goods are packed for dispatch. This is a document prepared by the seller showing the goods contained/packed in every container, box or carton being delivered to the buyer
-A copy of the packing note is packed with the goods to make/help the buyer have a spot check.
The contents of a packing note include;
–Description of goods packed
-Quantities of goods packed
-The means of delivery
NOTE: A packing not does not contain prices of goods. This ensures that those people involved in checking and transporting goods do not know the value of goods. This is done as a precaution against theft.
- Advice note; This is a document sent by the seller to the buyer to inform the buyer that the ordered goods have been dispatched. It is usually sent through the fastest means possible.
-It contains the following;
-The means of delivery -A description of the goods
-The quantity dispatched -Date
-Name and address of buyer and seller
Functions of an advice note
- Informing the buyer that the goods are on the way so that in case of any delay in delivery, the buyer can make inquiries
- Alerting the buyer so that necessary arrangements can be made for payments when the goods arrive
- Can serve as an acknowledgement note, where one is not sent/
- Delivery note; This is a document sent by the seller to the buyer to accompany the goods being delivered.
-A delivery note is always made in triplicate (3), one copy remains with the seller and two sent to the buyer.
-When the goods reach the buyer, he/she confirms that the goods are the ones ordered for and that they are in the right condition by comparing the delivery note, the order and the goods. If the buyer is satisfied with the goods, he/she signs the two copies, retains the original and send the copy back to the seller. This serves as evidence that the goods have been received in the right condition and in the right quantities.
-Some businesses keep delivery books in which the buyer signs to indicate that goods have been received in good condition. A delivery book is used by the seller if he/she delivers goods by himself/herself as an alternative to a delivery note
The content of a delivery note includes the following;
- Name and address of the seller
- Name and address of the buyer
- Date of delivery
- Delivery note number
- Description of the goods delivered
- Quantities of the goods delivered
- Space for the buyer to sign and comment on the condition of the goods received.
Consignment note
This is a document prepared by a transporter to show that he/she has been hired to deliver specified goods to a particular buyer. This document is used when goods are delivered to the buyer by public means of transport e.g. by trains.
-The seller is the consignor, the buyer is the consignee and the goods the consignment
–The transporting company prepares the consignment note and gives the seller to complete and sign. The seller then returns the note to the transporter (carrier) who takes it together with the goods to the buyer.
-On receiving the goods, the buyer signs the consignment note as evidence that the goods were actually transported.
The content of a consignment note includes the following;
- Details of the goods to the transported
- Name address of seller (consignor)
- Name and address of buyer (consignee)
- Terms of carriage and conditions of transporting the goods
- The transportation cost
- Handling information
- Destination of goods
Goods Received note; This is a document sent by the buyer to the seller to inform him/her that goods sent have been received. It usually prepared in duplicate, the original is sent to the seller and the copy retained by the buyer.
The contents of the goods received note include;
- Date of the document
- Name and address of the buyer
- Name and address of the seller
- Corresponding purchase order
- Details of goods received
- Date the goods were received.
Returned goods note/Damaged goods note; If goods are damaged on the way, the buyer may return them to the seller. The buyer may also return goods for other reasons e.g.
- Wrong type of goods
- Excess goods
- Wrong quality goods
-When the goods are returned, the buyer informs the seller of the return by sending a goods returned note.
–A goods returned note is a document sent by a buyer to a seller to inform him/her that certain goods are being returned to the seller.
-Where the goods are returned because of damage, the note may be referred to as the damaged goods note.
The contents of the goods returned note include;
- Details of goods that have been returned to the seller
- Date goods are returned
- The number of (GRN)
- Order number
- Delivery number
- Name and address of both buyer and seller
–When the seller receives the note together with the goods, he issues a credit note
Documents used at the invoicing stage
This stage involves the seller requesting or demanding for payment from the buyer for the goods or services delivered.
Some of the documents used at this stage include:
Invoice
This is a document sent to the buyer by the seller to demand for payment for goods delivered or services rendered.
There are two types of invoices namely:
- Cash invoice-This is sent when payment is expected immediately after delivery thus acting as a cash sale receipt
- A credit invoice-This is sent when a buyer is allowed to pay at a later date.
Functions of an invoice
- It shows the details of goods sold i.e. quantity delivered, unit price, total value of the goods and terms and conditions of sale.
- It is a request to the buyer to make payment
- It serves as an evidence that the buyer owes the seller a certain amount of money
- It is used as a source document in recording the transaction in the book of accounts.
The contents of an invoice include the following:
- Invoice number
- Name and address of the seller
- Name and address of the buyer
- Date document is prepared
- Details of goods repaired
- Unit prices of goods delivered
- Total value of goods
- Discounts offered
- E and O.E printed at the bottom
The letters E and O.E (Errors and Omissions Excepted) means the seller reserves the right to correct any errors and omissions made in the invoice.
-On receiving the invoice, the buyer verifies the contents using the local purchase order and the delivery note. If the invoice is in order, the buyer makes arrangements to pay the amount stated.
Businesses which offer services issue a document called a bill, which serves the purpose of an invoice.
Credit note
This is a document sent by the seller to the buyer (credit buyer) to correct an overcharge. It is used to inform the buyer that the amount payable by him/her has been reduced
An overcharge is an excess amount charged beyond the right price.
Causes of overcharge may include;
- Arithmetical errors like wrong addition
- Price overcharges
- Inclusion of wrong or unordered items in the invoice
- Failure to deduct the allowable discounts
- Return of goods (damaged goods)
- Failure to note the return by the buyer of packing cases or containers used to deliver goods to him/her
- Use of wrong price list.
-The purpose of the credit note is to reduce the total invoice amount by the amount of the overcharge.
-A credit note is usually printed in red to distinguish it from other documents.
–Contents of a credit note include;
- Name and address of the seller and the buyer
- Credit note number
- Date document is prepared
- Description and value of goods returned by buyer (in case that was done)
- Total overcharge
Reasons why a seller would send a credit note to a buyer/circumstances under which a credit note is sent to a buyer.
-When there is an overcharge in an invoice
-When the original invoice had indicated items that were not supplied
-When the buyer returns empty cases/crates that had been charged in the invoice.
-When the buyer returns some goods to the seller
-If the buyer was entitled to a discount which was not given or taken care of in the invoice.
Debit note
This is a document sent by the seller to the buyer to correct an undercharge on the original invoice. It is used to inform the buyer that the amount payable by him has been increased.
-A debit note acts as an additional invoice.
-An undercharge arises when amount charged on products is less than their right price.
Causes of undercharge include:
- Price undercharges on items
- Arithmetic errors/mistaken in calculation
- Omission of items in the invoice
- Retention of crates and containers that were not involved by the buyer
- Deductions of more discount than what was give/intended
Circumstances under which a debit note will be sent to the buyer
- When there is an undercharge in the invoice
- If the buyer had been given a discount that was not due to him
- If some items had been omitted in the original invoice
- If the buyer decides to retain some empty containers or crates
Differences Between a debit note and a credit note
Documents used at the payment stage
This is the final stage of a credit business transaction. It takes place after the invoice has been received and ascertained to be correct or where necessary, corrections made.
The documents used at the payment stage include;
Receipt
This is a document issued to the buyer by the seller as proof that payment has been made.
-Payment can be done in cash, cheque, other forms of money or in kind
-The receipt also serves as a source document for making entries in books of accounts.
Contents of the receipt include;
- Date of payment
- Name of the person making payment
- Name of person/institution receiving payment
- Amount paid in words and figures
- Means of payment
- Receipt number
- Signature of person issuing the receipt.
-The issuance of a receipt by the seller to the buyer after receiving payment marks the end of the credit transaction between the seller and the buyer (where payment has been done in full)
-A receipt serves the same purpose as the cash sale slip
ii) Statement of Account
This is a document prepared by the seller and sent to the buyer, giving a summary of all the dealings/transactions between them during a particular period of time, usually a month. It has the following details;
- Date when it was prepared
- Name and address of the seller
- Name and address of the buyer
- Account number
- Date column-where the date of each transaction is recorded
- Particulars (Details)column-where the explanation of each transaction is shown
- Money column
-Debit column-increases in the amounts payable due to credit sales or under charge correction.
-Credit column-Decrease in the amounts payable due to overcharges corrected or payments recorded.
-Balance column-Amount owing after each transaction (Balance outstanding)
- Any discounts allowed to the buyer
- Date when the buyer is expected to clear the balance
- Terms of credit e.t.c.
-The statement of account enables the buyer to ascertain the correctness of the transactions which have taken place with the seller over the stated period.
iii)IOU
An IOU (I owe you) is a document written by the buyer and sent to the seller to acknowledge a debt.
-It does not specify date when settlement will be made.
-It acts as evidence that a debt exists.
