Commerce · Lesson 4

Documents, terms of trade, credit and means of payment

JAMBWAECNECO

What the syllabus asks

JAMB: 5 Purchase and sale of goods: procedure and documents used (enquiry, quotation, order, invoice, proforma invoice, statement of accounts, indent, consular invoice, bill of lading, certificate of origin, consignment note, etc.); terms of trade (trade discount, quantity discount, cash discount, warranties, C.O.D., C.I.F., F.O.B., E.&O.E., etc.); terms of payment: cash and credit (types, merits and…

WAEC: Purchase and sale of goods (procedure; documents: letter of enquiry, quotation, catalogue, price list, order, advice note, delivery note, invoice, debit note, credit note, statement of account, receipt; terms: trade, cash and quantity discounts, CWO, COD, E&OE, ex-works, loco, franco, carriage paid/forward; means of payment: cash, cheque, bank draft, money and postal orders, transfers, cards,…

NECO: Purchase and sale of goods (procedure; documents: letter of enquiry, quotation, catalogue, price list, order, advice note, delivery note, invoice, debit note, credit note, statement of account, receipt; terms: trade, cash and quantity discounts, CWO, COD, E&OE, ex-works, loco, franco, carriage paid/forward; means of payment: cash, cheque, bank draft, money and postal orders, transfers, cards,…

What you will learn

Describe the procedure in the purchase and sale of goods.
Explain the purpose of each business document used in home trade.
Distinguish between invoice and proforma invoice, and between credit note and debit note.
Prepare and check an invoice, credit note and statement of account with discounts and VAT.
Explain the common terms of trade and terms of payment.
Distinguish between trade, quantity and cash discounts.
Describe the forms of credit and their advantages and disadvantages.
Explain the means of payment, including cheques and electronic payment.
Describe the types and parties of a cheque, crossing and endorsement.

Key points

Procedure: enquiry → quotation → order → advice/delivery note → invoice → credit/debit note → statement → payment → receipt.
An order is an offer; acceptance by the seller creates a contract.
Advice note informs of dispatch; delivery note travels with goods and is signed; consignment note instructs the carrier.
Invoice: the bill, with prices, discounts, VAT (7.5%) and terms. Proforma invoice: advance invoice, not a demand.
Credit note reduces the debt (returns, overcharge); debit note increases it (undercharge).
Statement of account summarises a period’s transactions and the balance due.
Trade discount: to traders, deducted on invoice, not in ledger. Cash discount: for prompt payment, recorded. Quantity discount: for bulk.
Series discounts are applied one after another.
Payment terms: CWO, COD, prompt cash, net, monthly account, on approval, sale or return.
Delivery terms: ex-works/loco, carriage paid/forward, franco, FOR, FAS, FOB, C&F, CIF, ex-ship.
Credit forms: trade credit, hire purchase, deferred payment, credit sale, overdraft, loan, credit card, mortgage.
HP price = deposit + instalments; extra over cash price is the cost of credit.
Cheque parties: drawer, drawee (bank), payee. Crossed cheques must go into an account.
Bank draft: drawn by a bank on itself; guaranteed payment.
Electronic payment: instant transfers, cards and POS, USSD, wallets, QR codes; standing orders, direct debits, credit transfers.

Start here: The procedure in buying and selling

Mr Bello runs a provisions shop in Ilorin and wants to buy 50 bags of sugar from a distributor in Lagos. From his first letter to his final payment, each stage produces a document. Figure 1 shows the sequence.

Enquiry. The buyer sends a letter of enquiry (or e-mail, phone call or online message) to several suppliers, asking about prices, quality, discounts, delivery dates and terms of payment. A routine enquiry asks for a catalogue or price list; a specific enquiry asks about particular goods.
Quotation. Each supplier replies with a quotation, price list or catalogue, sometimes with samples. A tender is a written offer made in response to an invitation, common in government purchases.
Order. The buyer compares quotations and sends an order to the chosen supplier, stating quantity, description, price, delivery and payment terms. An order is an offer; when the seller accepts it (an acknowledgement or simply dispatching the goods), a legally binding contract exists.
Acknowledgement. The seller acknowledges the order and may give a delivery date.
Dispatch. The seller sends an advice note telling the buyer goods are on the way. Goods travel with a delivery note (signed by the buyer as proof of delivery) and, if sent by a carrier, a consignment note or waybill.
Invoice. The seller sends the invoice, the bill for the goods.
Adjustments. If goods are returned or overcharged, a credit note is sent; if undercharged, a debit note.
Statement of account. At the end of the month the seller sends a statement summarising invoices, credit notes, debit notes and payments, and showing the balance due.
Payment. The buyer pays by transfer, cheque, draft or cash.
Receipt. The seller issues a receipt.

In a cash sale in a shop, many stages merge: the customer enquires orally, sees the price, pays and receives a receipt at once.

Worked example 4.1 (JAMB-style)

The document a buyer sends to a seller asking for the price and terms of goods is

A. quotation B. letter of enquiry C. invoice D. advice note

Answer: B. The quotation is the seller’s reply.

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Practice questions

1. A letter of enquiry is sent by the

buyer to the seller asking about prices and terms
seller to the buyer
bank to the buyer
carrier to the seller

Show answer

A: buyer to the seller asking about prices and terms
The seller replies with a quotation.

2. A catalogue is

an order
a receipt
a bill of exchange
a booklet describing goods with pictures and prices

Show answer

D: a booklet describing goods with pictures and prices
Used by mail-order and wholesale firms.

3. An invoice is sent by the seller to

correct an overcharge
order goods
inform the buyer of goods sent and the amount due
acknowledge payment

Show answer

C: inform the buyer of goods sent and the amount due
It is a bill.

4. A credit note is issued by the seller when

payment is received
the buyer has been overcharged or has returned goods
the buyer has been undercharged
goods are dispatched

Show answer

B: the buyer has been overcharged or has returned goods
A debit note covers undercharges.

5. A statement of account shows

a summary of transactions and the balance owed
only cash sales
goods in a warehouse
a quotation

Show answer

A: a summary of transactions and the balance owed
Sent periodically to credit customers.

Key words

Letter of enquiry: A letter from a prospective buyer asking for information on goods, prices and terms.
Quotation: A seller’s reply stating the price and terms on which goods will be supplied.
Catalogue: An illustrated booklet or web page describing a seller’s goods, usually with prices.
Price list: A list of goods and their current prices, issued to customers.
Order: A document by which a buyer requests the supply of goods on stated terms.
Advice note: A document sent to inform the buyer that goods have been dispatched.
Delivery note: A document that accompanies goods, signed by the buyer on receipt.
Consignment note: A document accompanying goods sent by road or rail, giving details for the carrier.
Invoice: A document from the seller showing goods supplied, prices, discounts, VAT, total and terms of payment.
Proforma invoice: An invoice sent in advance, e.g. as a quotation or where payment is required before delivery; it is not a demand for payment.
Credit note: A document reducing the amount owed by the buyer, e.g. for returned goods or an overcharge; often printed in red.
Debit note: A document increasing the amount owed by the buyer, e.g. for an undercharge.

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