Documents used in home trade

What is commercial transaction?

Is a transaction that involves trade and any arrangement that involves exchange in goods between two parties is called a trade transaction.

In home trade, there is an exchange of goods and services and this may take different forms. It can be a financial transaction or a barter transaction. Under the financial transaction, we may have;

• A credit transaction

This is when payment is made later than.

• A cash transaction

This is when both parties of a transaction happen at the same time [simultaneously].

Once items are purchased on credit, there many documents involved and once it is a cash transition, a number of documents are limited.

Credit transaction

• Letter of inquiry
• Reply
• Quotation
• Price list
• Catalogue
• An order form
• Credit status inquiry
• Advice note
• Package sheet
• Delivery note
• An invoice
• Good returned note
• Debit note
• Credit note
• Statement of account
• Cheque
• Cash sale receipt

Stage one

1. Letter of inquiry

This is a first document/letter addressed to a prospective seller by the buyer inquiring about more information about given items that a buyer is interested in buying.

An inquiry may be formal or informal. An inquiry that is formal takes the form of an ordinary letter and an informal one takes form of an ordinary conversation on form or from a friend or workmate.

Example;

Assume a commercial transaction with a wholesaler, Mukasa and company and a retailer, Walugembe and sons.

The retailer wants to buy goods from the wholesaler but they donot know if the wholesale has the goods, they want, neither do they know their prices and terms of selling them.

The following is an inquiry made by Walugembe and sons Mukasa and company.

 Importance

• It looks for more information about a given item on sale
• It inquires about location of the goods, terms of sale, nature of the goods

Stage two

2. Reply

In reply of the inquiry, the wholesaler may respond to retailer in one of the following ways; he may send;

• A price list

This is a document sent by a seller to a buyer containing list of items and their respective prices. It is commonly used for popular goods which are well known to the buyer since it offers very brief information about the goods.

• A prices current

This is also sent in reply to an inquiry and it can be sent in adding to the price list because the prices of some items tend to change over time such that original prices on the price list has either increased or decreased.

In other words, a price current is a document that shows the prevailing prices of a commodity at the price.

• Sample

A sample is an item representing goods that a supplier has in stock. Some suppliers will send samples to perspective buyer in reply to an inquiry.

• A catalogue

It takes the form of a booklet and it contains detailed description and illustration of goods. The information provided is displayed in attractive pictures and colours.

It may contain the prices, the terms of selling and delivery. A catalogue is only given to regular customers or agents of the seller.

• A quotation

It is used for specific kinds of goods for which there are no standards changes or no price list used. It is used to quote prices of goods that need construction eg houses, roads and furniture works.

A quotation simply states the terms and conditions under which goods can be sold. It also takes the form of an ordinary letter.

Stage 3

3. An order form/note

This is a request note from the buyer to a seller asking the latter to supply the former with a specified type and quality of goods.

This happens after a buyer has received a quotation, where he critically examines and selects the goods required, the quality and the prices of individual items ordered for.

An order should be written in duplicate such that the original is sent to the supplier and the duplicate kept by the buyer.

Stage 4

4. An acknowledgment note

At this stage, the seller makes a decision whether or not to deliver goods to the buyer either on cash or credit.

Most transactions between traders ie between wholesalers and retailers are credit and most transactions between a trader and consumer is on cash.

If a seller refuses credit or if a buyer prefers cash. The following terms may be used;-

• Cash with order

Under these terms a buyer is required to send cash together with order

• Cash on delivery

Under these terms the buyer collects the money of buyer as they deliver the goods

• Spot cash

Under these terms the buyer pays cash as he or she collects each from the seller’s premises

• Prompt cash

Here a buyer is allowed a credit period of 7days or less after which they have to pay cash.

NB: when the seller has received cash from the buyer, they will issue the buyer with a cash sale receipt. This is a document that acknowledges receipt of cash from buyer.

Stage 5

5. Credit terms

If the seller decides to extend credit to the buyer, a document known as an invoice is prepared for the buyer. When an invoice is prepared it serves the following purpose;

• It is demand by the seller to the buyer to pay the amount of the money within the invoice
• It helps the buyer to acknowledge that they have received the goods
• An invoice is done also a promise to pay by the buyer

The contents of an invoice are almost similar to the contents of an order except it specifies the terms of delivery.

A trader will in most cases a discount to a fellow trader or to a consumer who buys in large quantities.

There are 3 types of discounts

• Trade discount

A trade discount is normally given only to a fellow trade irrespective whether the trader buyers in large quantities or not for example a wholesaler give a trade discount to a retailer.

• Quantity discount

A quantity discount is usually allowed in addition in addition to the trade discount for a trade who buyer in large quantities or to a consumer who buys in large quantities or to a consumer who buys in large quantities for example a wholesaler may buy. In addition he may allow a quantity discount of 31% to only the trade who buys 100kg or more.

• Cash discount

A cash discount is given to traders or consumers to encourage them to pay promptly. It is the only discount prescribed in the invoice for example in the invoice above 2%, 1month means that if the buyer pays within 1month he gets a discount of 2%, 1%, 2months          if its after two months the discount will be 1% and after that he will have to pay on interest of 2½% if he has not yet paid.

1. & 0. E Stands for Error and omissions accepted, this initial will be found in the left hand corners of every invoice. It means that the seller is reserving the right to make corrections in the invoice if they were any mistakes. Mistakes such as overcharging, under charging, mathematical errors, short delivery or wrong delivery etc. they can be found in a delivery when these errors occur, the seller prepares two documents to correct mistakes.

• Credit note

A credit note corrects mistakes of over charge of when a buyer was charged more than they were supposed to pay. It therefore reduces on the money on the invoice. A credit note may also arise due to any of the following;

1. Wrong quantity of goods sent
2. Wrong quality of goods sent
3. Damage of part of the goods supplied
4. Wrong description of goods sent
5. An thematic error in the invoice
6. Defective goods sent
7. When some packaging materials are returned for example crates [empty], jerry – cans etc

• Debit note

It corrects mistakes of under charge and mathematical errors that reduced the price of the invoice. In other words a debit not will increase the amount charged on the invoice.

EXERCISE ON THE DISCOUNT

1. A trader bought 50 boxes of soap at 12,000≠ each he was given a trade discount of 5% and a cash discount of 2.5%. How much did he pays?

50 boxes x 12,000 =600,000≠

2. A retailer was offered the following terms. A price of 20,000≠ trade discount of 10% and a cash discount of 5% if he paid within one month. A further discount of 4% was offered if he paid within 2 month and no discount given thereafter. How much if he is likely to pay or if he pays with in the 1 months.
3. b) Within 2month
4. c) if pays at the end of the third month
5. Price 20,000≠

Trade discount    =          100% – 10% x 20,000 = 90/100      x 20,000   =          18,000≠

Cash discount                   =          97.5/100 x 18,000  =          17,100≠

Price 20,000≠

Trade discount     =         90/100  x 20,000 =          18,000≠

Cash discount                 =          96/100 x 18,000  =           17,280≠

3. A trader bought 4m of cloth at 1000≠ each he was given a trade discount of 20%. If settled the debt within 30 days, he would be given a cash discount of 2%. How does he pay paid immediately?

Trade discount       = [100 – 20] % x 4,000 = 80/100 x 4,000  = 3,200≠

Cash discount                 = 100% – 2%  =   98/100x 3,200  = 3,136≠

4. A trader bought 40 boxes of merchandise worth 10,000≠ each. There was given a trade discount 20% and a cash discount of 4% if he settles the debt in 30 days. How much did he pay?
5. If he pay immediately

1 box               =          10,000≠

40boxes       =         40 x 10,000   =          400,000

T.d               = 80/100 x 400,000 =          320,000≠

C.d              =         96/100    x 320,000  =          307,200≠

How much did he pay if he paid after 30 days

He would pay 320,000≠

5. A trader bought goods worth 760,000≠ after he was allowed a trader discount of 20% and cash discount of 5%. Calculate the original price of the good.

C.d    = 100% – 5% of x = 760,000 = 100 x95x/100  =760,000 x 100/95

= 8,000,000≠

T.d    = 100% – 20% of x = 800,000  = 100 x 80x/100 =   800,000 x 100

80x/80 = 800,000 x 100/80 = 1,000,000≠

The original price was 1,000,000≠

6. A trader had to pay 400,000≠ after a trade discount of 30% and a cash discount of 2.5%. Calculate the list price.

= 100 x 97.5x/100 =   400,000 x 100

=97.5x/97.5     =   40,000,000/97.5   = 410,256.4103

100 x 70x/100            = 410,256.4103 x 100

70x/70                = 410,256.4103/70

X         = 586,080,5861≠

X         = 586,081≠

Stage 5

6. Delivery.

Goods may be delivered either by the seller or collected by the buyer. As evidence that goods have been delivered by the better and received by the buyer. The 3 documents can be signed

• An advice/dispatch note

This is a document sent by the seller to a buyer to simply notify the buyer that goods have been released or dispatched from the seller’s premises so that the buyer prepares to receive the foods

• Delivery note

This is a document sent by the seller to the buyer accompanying the goods that are being sent so that the buyer can check them on arrival.

In case the seller uses his own vehicle to deliver the goods, the transporter or driver is also given a copy. The delivery note is signed by the buyer to acknowledge that goods have been received in expected quantities and correct pricing

• The consignment note/package note

This is prepared for the transporter of the goods. In other words it is a contract between the seller and the transporter. This document is evidence that the seller has given the transporter goods to be given to the buyer.

A consignment note contains the details of the seller ie his name and address and the details of the buyer. The transport signs the document as evidence that they have received the goods.

7. A statement of account

Is a document sent by the seller to the buyer at the end of each month summarizing all the transactions between the buyer and seller within the month?

A statement of account should consist of the following;

• The dates on which each transaction was made and the amounts that were changed
• The balance to be paid at the end of the month
• The amount credited if goods were turned the buyer
• The amount debited if the buyer was undercharged

8. The proforma invoice

This type of invoice is issued to the buyer by the seller. The invoice is sent when the seller required payment of goods to be done before they are delivered.

It is usually used for small orders or when prices are on certain. It also has all the details of goods and prices.

NOTE: Home trade [internal trade] may be carried out into 2 levels the wholesale trade and retail trade.

A VIDEO ABOUT DOCUMENTS USED IN TRADE