Invoices and credit notes provide the evidence needed to record and adjust credit transactions. Before choosing a bookkeeping entry, identify who issued the document, what it relates to and whether money has actually moved.
Invoices and credit notes: start with the role of the document
A customer invoice and a supplier invoice may look similar, but they sit on opposite sides of the business’s records. A sales invoice generally supports an amount charged to a customer. A purchase invoice supports an amount charged by a supplier. A payment receipt provides different evidence: it relates to settlement.
Always check the date, parties, reference, description, quantities and total. If the question includes tax, currency conversion or a special condition, treat that separately. The example below deliberately excludes tax.
A purchase followed by a return
A business buys 20 boxes of stationery on credit at a list price of PKR 1,000 each. The supplier gives a 10% trade discount. The invoice total is PKR 18,000: PKR 20,000 less PKR 2,000.
If the stationery is treated as an expense, record a PKR 18,000 debit to stationery expense and a PKR 18,000 credit to trade payables. The trade discount has already reduced the invoice amount; do not record the undiscounted PKR 20,000 as the amount owed.
Two boxes are then returned, and the supplier issues a credit note at the same discounted price of PKR 900 per box. The credit note is PKR 1,800. Debit trade payables and credit stationery expense by PKR 1,800. The amount now owed is PKR 16,200.
What happens when the supplier is paid?
Assuming no other charges or settlement adjustments, payment of PKR 16,200 clears the remaining liability. Debit trade payables and credit bank. This payment does not create a new stationery expense.
The sequence gives you a useful check: invoice 18,000 minus credit note 1,800 minus payment 16,200 equals zero outstanding. If your supplier account still shows a balance, look for a missing or duplicated entry.
Trade discount and settlement discount need different questions
A trade discount reduces the price being invoiced. A settlement discount depends on payment conditions, such as paying within a stated period. Read whether those conditions have actually been met before using the discount. Apply the treatment required by the current syllabus and the facts in the question.
A document check you can practise
You receive an invoice and a bank statement showing a payment with the same amount. Is that enough to match them? Check the supplier, invoice reference, payment date and any other open invoices. Equal amounts alone do not prove that the payment settled that particular invoice.
Keep a short document trail for each practice transaction: invoice, credit note if any, payment evidence and account balance. This builds the reasoning behind the journal entry. Study the FA1 course and use the official FA1 guide to plan your source-document revision.
Follow the same transaction from the seller’s side
The stationery example above describes the buyer’s records. The seller sees the same invoice as a sale to a customer. Ignoring tax, the seller debits trade receivables and credits sales for PKR 18,000. When the two boxes are returned and a credit note of PKR 1,800 is issued, the seller debits sales returns and credits trade receivables. The credit note reduces the amount the customer owes.
When the customer pays PKR 16,200, the seller debits bank and credits trade receivables. The customer balance is now zero. Any inventory and cost-of-sales entries depend on the recording system and facts in the question; do not assume the selling price equals the seller’s inventory cost. Keep the document’s commercial value separate from the cost of the goods supplied.
A settlement discount calculation
Assume a supplier invoice of PKR 10,000 offers a 2% discount if paid within ten days. The business pays within the qualifying period and is entitled to the discount. The discount is PKR 200 and the cash payment is PKR 9,800. If the payable was initially recorded at PKR 10,000 and the question uses a discounts-received account, debit trade payables 10,000, credit bank 9,800 and credit discounts received 200.
The three amounts form one balanced entry. Crediting bank for the entire PKR 10,000 would misstate the payment. Debiting payables for only PKR 9,800 would leave an amount outstanding that the supplier has agreed to waive. Read the condition and accounting treatment carefully, especially where tax, expected discounts or revenue measurement appear in a more advanced question.
For the seller, the treatment of a prompt payment discount involves revenue measurement as well as the cash received. Do not apply the buyer’s discounts-received entry to the seller. ACCA’s FA1 technical articles include guidance on discounts and the relevant distinctions. Use the article and syllabus for the exam you are preparing rather than relying on a very old revision example.
Calculate successive discounts in the right order
If a question gives a list price of PKR 20,000, a 10% trade discount and a further 2% settlement discount on the resulting invoice, calculate the invoice first. Ten per cent of PKR 20,000 is PKR 2,000, leaving PKR 18,000. Two per cent of PKR 18,000 is PKR 360, so the qualifying settlement is PKR 17,640. These assumptions exclude returns and tax.
Do not add the discount percentages and deduct 12% from the list price. That would give PKR 17,600 and use the wrong base for the second discount. If a credit note reduces the balance before settlement, read whether the discount applies to the reduced balance. The amount on which the percentage is calculated matters as much as the percentage itself.
Distinguish an order, an invoice and a statement
A purchase order records what a business has requested from a supplier. A goods received record helps establish what actually arrived. An invoice records the supplier’s charge. Matching the documents can reveal a price difference, missing delivery or duplicate billing. Do not treat the mere existence of a purchase order as proof that the goods have been delivered and the invoice is correct.
A supplier statement normally summarises the account’s transactions and outstanding amount. It can contain several invoices, credit notes and payments. Recording the statement total as a new purchase when its invoices have already been entered would duplicate the liability. Instead, compare the statement with the supplier’s account and investigate unmatched lines.
What if the credit note exceeds the outstanding balance?
Suppose an invoice for PKR 5,000 has already been paid in full, and the supplier later accepts a return valued at PKR 1,000. The credit note may create a debit balance on the supplier account. Depending on the agreement, the supplier may refund the amount or offset it against a future invoice. The credit note itself does not prove that bank has received a refund.
If a refund subsequently arrives, record the bank receipt and clear the amount recoverable. Keep the return approval, credit note and refund evidence together. This separation helps you avoid posting a cash movement before it occurs and makes it easier to identify unresolved credits during an account review.
A practical source-document checklist
For each document, identify whether you are the buyer or seller, whether the transaction is on credit or paid immediately, and whether the document creates or reduces an amount owed. Confirm the net price after trade discounts, identify any separate tax, and check the conditions for settlement discounts. Finally, reconcile the balance after invoices, credit notes and payments.
Practise with a sequence rather than isolated documents. Write one invoice, one return and one payment into a customer or supplier account, then explain the ending balance. If the answer is unexpected, trace each document before changing the journal. This develops the document-reading skill behind accurate bookkeeping rather than memorising entries without context.
Frequently asked questions
Is an invoice the same as proof of payment?
No. An invoice requests or records a charge. A receipt, bank record or other payment evidence is needed to establish that the amount was paid.
Does a credit note always mean cash is refunded immediately?
No. It can reduce an outstanding balance or create an amount to settle later. Check the underlying transaction and the agreed settlement.