Accounting 101: Fundamental of Commercial Transactions

Commercial transactions form the foundation of a company's operations, involving the essential activities of purchasing and selling goods or services, as well as managing the corresponding payments. In this post, we will examine the accounting treatment of these fundamental transactions, using the example of BexCo, a pet food and toy company, to provide a clear illustration of the principles involved.

This analysis will follow the various categories of commercial transactions encountered by BexCo. Each category will be defined, the key relevant accounting accounts will be identified, and illustrative examples with solutions will be provided. Before diving into the transaction categories, we will first explain the fundamental calculation of the total invoice amount, including Value Added Tax (VAT).

Before we begin, I have to say that I am writing this as I am preparing myself for the first exam of financial accounting. The course that I am taking spans for one year. I am based in Antwerp, Belgium, so the accounting treatment provided here is aligned with the Belgium GAAP and IFRS, and may be different with US GAAP. Here are two documents as references for this post:

• Chart of accounts
• Solutions/journal entries of the exercise (scenarios are provided in the end of the post)
• Book: A Practical Guide to Financial Accounting

1. Fundamental Calculation: Total Invoice Amount

The total invoice amount, including VAT, is determined using the following formula:

Price of Goods - Commercial Discounts + Additional Charges - Financial Discount = Basis for VAT + VAT = Total Invoice Amount

 Let's break down each component:

• Price of Goods: The initial negotiated price of the goods or services.
• Commercial Discounts: Price reductions based on factors like bulk purchases or long-term relationships. These are applied before VAT is calculated.
• Additional Charges: Costs added to the base price, such as handling, delivery, or special packaging. These are also included before VAT is calculated.
• Financial Discount: A discount offered for early payment. These are recorded separately and subtracted last to obtain the final amount to be paid. The amount written on the invoice include this type of discount (already subtracted) as customers usually take advantage of this.
• Basis for VAT: The net amount on which VAT is calculated. It includes the price of goods adjusted for commercial discounts and any additional charges.
• VAT: Value Added Tax, a consumption tax calculated as a percentage of the Basis for VAT.
• Total Invoice Amount: The final amount owed, including the price of goods, commercial discounts, additional charges, and VAT. The total invoice amount that will be paid may be affected by the financial discount.

Consider a scenario where BexCo purchases goods for €1,000, receives a commercial discount of €100, incurs additional charges of €50, and receives a financial discount of €20 for early payment. The VAT rate is 21%.

• Price of Goods: €1,000
• Commercial Discount: - €100
• Additional Charges: + €50
• Financial Discount: - €20
• Basis for VAT: €1,000 - €100 + €50 = €950
• VAT (21%): €950 * 0.21 = €199.5
• Total Invoice Amount: €950 + €199.5 = €1,149.5
• Total Amount to be paid if financial discount is applied: €1,149.5 - €20 = €1,129.

2. Purchase Invoice

A purchase invoice is a formal document received from a supplier detailing goods or services purchased, their cost, applicable taxes (e.g., VAT), and payment terms. It represents a financial obligation for BexCo.

Key Accounts:

• 604 Purchase of Goods for Resale: An expense account, debited to record the cost of goods acquired for resale.
• 411 VAT to Reclaim: An asset account, debited to record the Value Added Tax paid on purchases, which can be subsequently reclaimed from the tax authorities.
• 440 Suppliers: A liability account, credited to record the amount owed to suppliers for goods or services purchased on credit.

Example:

On 10/01/2025, BexCo receives purchase invoice PI 001 from "Pawsome Supplies" for pet food costing €150 (excluding VAT). The VAT rate is 21%.

Solution:

• Debit: 604 Purchase of Goods for Resale: €150
• Debit: 411 VAT to Reclaim: €31.50 (calculated as €150 * 0.21)
• Credit: 440 Suppliers: €181.50 (calculated as €150 + €31.50)

3. Sales Invoice

A sales invoice is a formal document issued by BexCo to its customers, detailing goods or services sold, their price, applicable taxes, and payment terms. It represents a claim on customer assets.

Key Accounts:

• 400 Trade Debtors: An asset account, debited to record the amount owed by customers for goods or services purchased on credit.
• 704 Sales of Goods for Resale: A revenue account, credited to record the income generated from sales.
• 451 VAT Due: A liability account, credited to record the VAT collected on sales, which is payable to the tax authorities.

Example:

On 02/02/2025, BexCo issues sales invoice SI 001 to "Furry Friends Pet Shop" for pet toys sold for €200 (excluding VAT). The VAT rate is 21%.

Solution:

• Debit: 400 Trade Debtors: €242 (calculated as €200 + €42)
• Credit: 704 Sales of Goods for Resale: €200
• Credit: 451 VAT Due: €42 (calculated as €200 * 0.21)

4. VAT Declaration

The VAT declaration is a periodic process where BexCo calculates its net VAT liability or refund. It involves offsetting the VAT reclaimed on purchases (account 411) against the VAT due on sales (account 451).

Key Accounts:

• 451 VAT Due: Debited to reduce the liability.
• 411 VAT to Reclaim: Credited to reduce the asset.
• 5500 Bank Account: Credited if a net payment is made to the tax authorities or debited if a net refund is received.

Example:

On 02/04/2025, BexCo prepares its VAT declaration (DIV 002). Up to this point, BexCo has €31.50 in VAT to reclaim and €42.00 in VAT due.

Solution:

• Debit: 451 VAT Due: €31.50
• Credit: 411 VAT to Reclaim: €31.50

On 15/04/2025 (C/A004), the remaining VAT Due will be paid.

• Debit: 451 VAT Due: €10.50
• Credit: 5500 Bank Account: €10.50

5. Commercial Discount

A commercial discount is a reduction in the standard selling price of goods or services. It can be granted to customers or received from suppliers.

Key Accounts:

• 608 Commercial Discounts Received (-): A contra-expense account, credited to reduce the cost of purchases when a discount is received.
• 708 Commercial Discount Granted (-): A contra-revenue account, debited to reduce sales revenue when a discount is granted.

Example (Discount Received):

On 06/05/2025, BexCo receives purchase invoice PI 035 from "PawCo" for goods costing €130,000 (excluding VAT). A commercial discount of 10% is granted. VAT is 21%.

Solution:

• Debit: 604 Purchase of Goods for Resale: €130,000
• Debit: 411 VAT to Reclaim: €24,570 (calculated as (€130,000-€13,000) * 0.21)
• Credit: 608 Commercial Discounts Received (-): €13,000 (calculated as €130,000 * 0.10)
• Credit: 440 Suppliers: €141,570

Example (Discount Granted):

On 10/05/2025, BexCo issues sales invoice SI064 to "Paws R Us" for €60,000 (excluding VAT), with a 10% commercial discount. VAT is 21%.

Solution:

• Debit: 400 Trade Debtors: €65,340 (calculated as (€60,000 - €6,000) + (€60,000 - €6,000) * 0.21)
• Debit: 708 Commercial Discount Granted (-): €6,000 (calculated as €60,000 * 0.10)
• Credit: 451 VAT Due: €11,340 (calculated as (€60,000 - €6,000) * 0.21)
• Credit: 704 Sales of Goods for Resale: €60,000

6. Additional Charges

Additional charges are supplementary costs added to the base price of goods or services, such as handling fees, delivery charges, or special packaging costs. They are recorded within accounts such as purchase of goods for resale or sales of goods depending on whether they are charged by the supplier or by the company.

Example (Additional Charges from Supplier):

On 16/05/2025, BexCo receives purchase invoice PI053 from "Tails & Treats" for goods costing €130,000 (excluding VAT), a commercial discount of 10%, and additional charges of €500. The VAT rate is 21%.

Solution:

• Debit: 604 Purchase of Goods for Resale: €130,500 ( 130,000 + 500 of additional charges)
• Debit: 411 VAT to Reclaim: €24,675 (calculated as (€130,000 - €13,000 + €500) * 0.21)
• Credit: 608 Commercial Discounts Received (-): €13,000 (calculated as €130,000 * 0.10)
• Credit: 440 Suppliers: €142,175

Example (Additional Charges to Customer):

On 23/05/2025, BexCo issues sales invoice SI067 to "Happy Pets Store" for goods costing €60,000 (excluding VAT), additional delivery charges of €1,000 and a commercial discount of 5%. The VAT rate is 21%.

Solution:

• Debit: 400 Trade Debtors: €70,180
• Debit: 708 Commercial Discount Granted (-): €3,000
• Credit: 451 VAT Due: €12,180 (calculated as (€60,000 + €1,000 - €3,000) * 0.21)
• Credit: 704 Sales of Goods for resale: €61,000

7. Financial Discounts

A financial discount is a reduction in the amount payable, granted for early settlement of an invoice. It is a financial expense when granted and financial income when received.

Key Accounts:

• 657 Financial Discounts Granted: An expense account, debited to record the cost of discounts given for early payment.
• 757 Financial Discounts Received: An income account, credited to record the discounts earned from early payment to suppliers.

Example (Discount Received):

On 28/11/2025, BexCo receives purchase invoice PI078 from "Pawsome Supplies" for goods costing €100,000 (excluding VAT). A financial discount of 3% is offered if paid within 10 days. VAT is 21%.
On 03/12/2025 (CA142), BexCo pays early, taking advantage of the discount.

Solution (on 03/12/2025):

• Debit: 440 Suppliers: €120,370
• Credit: 5500 Bank Account: €117,370 (calculated as €120,370 - (€100,000 * 0.03))
• Credit: 757 Financial Discounts Received: €3,000 (calculated as €100,000 * 0.03)

8. Credit Note

A credit note is a document issued to rectify an overcharge, acknowledge returned goods, or adjust an invoice. It can be issued to customers (reducing amounts receivable) or received from suppliers (reducing amounts payable).

Example (Credit Note Received):

On 10/12/2025, BexCo receives credit note ICN005 from "Whiskers Wholesale" for €26,000 (excluding VAT) due to damaged goods related to purchase invoice PI035. The VAT rate is 21%.
Solution:

• Debit: 440 Suppliers: €28,314 (calculated as €26,000 - €2,600 + €4,914)
• Debit: 608 Commercial Discounts Received: €2,600 (calculated as €26,000 * 0.10)
• Credit: 411 VAT to Reclaim: €4,914 (calculated as (€26,000 - €2,600) * 0.21)
• Credit: 604 Purchase of Goods for Resale: €26,000

9. Modes of Payment

Modes of payment refer to the various methods used to settle financial obligations, such as cash, bank transfers, cheques, and other electronic transfers.

Key Accounts:

• 5500 Bank Account: An asset account, credited for payments made, debited for payments received.
• 570 Cash at Hand: An asset account, credited for cash payments made, debited for cash received.
• 440 Suppliers: A liability account, debited to decrease the amount owed when payments are made.
• 400 Trade Debtors: An asset account, credited to decrease the amount owed when payments are received.
• 5501 Bank Account - Cheque Written Out: A temporary asset account, credited when a cheque is issued, then debited when the cheque clears to transfer the balance to the main bank account (5500).
• 54 Amounts overdue and in the process of collection: an asset account, debited when the debt from a client is overdue. Credited when the client pays.
• 58 Internal transfer of funds: used for movements of money between different accounts within BexCo

Example (Cash Payment to Supplier):

On 12/12/2025, BexCo pays supplier "Global Pet Supplies" €1,210,000 in cash (CD064) to settle invoice PI036.

Solution:

• Debit: 440 Suppliers: €1,210,000
• Credit: 570 Cash at Hand: €1,210,000

Example (Cheque Payment to Supplier):

On 13/12/2025, BexCo issues a cheque (Cheque060) to "Global Pet Supplies" for €1,210,000 to settle invoice PI037. On 14/12/2025, the cheque clears.

Solution (on 13/12/2025):

• Debit: 440 Suppliers: €1,210,000
• Credit: 5501 Bank Account - Cheque Written Out: €1,210,000
• Solution (on 14/12/2025):
• Debit: 5501 Bank Account - Cheque Written out: €1,210,000
• Credit: 5500 Bank Account: €1,210,000

Example (Payment received from customer):

On 15/12/2025, BexCo issues sales invoice SI064 to "Mega Pet Mart" for €2,000,000 (excluding 21% VAT). On 15/12/2025 (Cheque076) "Mega Pet Mart" is overdue. On 16/12/2025, "Mega Pet Mart" finally settles the overdue payment (CA066).

Solution (on 15/12/2025):

• Debit: 400 Trade debtors: €2,420,000
• Credit: 451 VAT due: €420,000
• Credit: 704 Sales of goods for resale: €2,000,000

Solution (on 15/12/2025):

• Debit: 54 Amounts overdue and in the process of collection: €2,420,000
• Credit: 400 Trade debtors: €2,420,000

Solution (on 16/12/2025):

• Debit: 5500 Bank account: €2,420,000
• Credit: 54 Amounts overdue and in the process of collection: €2,420,000

Example (Internal transfer of funds):

On 18/12/2025, BexCo does an internal transfer from cash to the bank account.

Solution (on 18/12/2025):

• Debit: 58 Internal transfer of funds: €200,000
• Credit: 570 Cash at hand: €200,000

10. Exercises

Here are the 20 scenarios aligned with the journal entries, as requested. You can use these to practice recording the transactions. Make sure to use the chart of accounts and check the solutions/journal entries of the exercise.

1. 10/01/2025 PI 001: BexCo receives a purchase invoice from "Pawsome Supplies" for pet food costing €150 (excluding VAT). The VAT rate is 21%.
2. 02/02/2025 SI 001: BexCo issues a sales invoice to "Furry Friends Pet Shop" for pet toys sold for €200 (excluding VAT). The VAT rate is 21%.
3. 02/04/2025 DIV 002: BexCo prepares its VAT declaration for the period covering the transactions in January and February.
4. 15/04/2025 C/A004: BexCo settles its net VAT liability with the tax authorities.
5. 06/05/2025 PI 035: BexCo buys goods for resale from supplier "PawCo" for an amount of €130,000 (excluding 21% VAT). A commercial discount of 10% is offered.
6. 10/05/2025 SI064: BexCo sells goods to "Paws R Us" for €60,000 (excluding VAT). A commercial discount of 10% is granted. The VAT rate is 21%.
7. 16/05/2025 PI053: BexCo purchases goods from "Tails & Treats" for €130,000 (excluding VAT). A commercial discount of 10% is applied and there is an additional handling charge of €500. The VAT rate is 21%.
8. 23/05/2025 SI067: BexCo sells goods to "Happy Pets Store" for €60,000 (excluding VAT) and charges an additional delivery fee of €1,000. A commercial discount of 5% is applied. VAT is 21%.
9. 28/11/2025 PI078: BexCo receives an invoice from "Pawsome Supplies" for goods purchased for resale amounting to €100,000 (excluding VAT). A financial discount of 3% is offered if BexCo pays within 10 days. The VAT rate is 21%.
10. 03/12/2025 CA142: BexCo takes advantage of the financial discount and pays "Pawsome Supplies" the discounted amount for invoice PI078.
11. 06/12/2025 PI035: BexCo receives a purchase invoice from "Whiskers Wholesale" for goods amounting to €130,000 (excluding VAT). A 10% commercial discount is applied. The VAT rate is 21%.
12. 10/12/2025 ICN005: BexCo receives a credit note from "Whiskers Wholesale" for €26,000 (excluding VAT) due to damaged goods from the previous purchase (PI035). The VAT rate on the credit note is also 21%.
13. 12/12/2025 PI036: BexCo purchases goods for resale from "Global Pet Supplies" for €1,000,000 (excluding 21% VAT).
14. 12/12/2025 CD064: BexCo pays "Global Pet Supplies" the full amount of invoice PI036 in cash.
15. 13/12/2025 PI037: BexCo receives another invoice from "Global Pet Supplies" for goods purchased for resale, amounting to €1,000,000 (excluding VAT). The VAT rate is 21%.
16. 13/12/2025 Cheque060: BexCo issues a cheque to "Global Pet Supplies" to settle invoice PI037.
17. 14/12/2025: The cheque issued to "Global Pet Supplies" (Cheque060) clears BexCo's bank account.
18. 15/12/2025 SI064: BexCo sells goods to "Mega Pet Mart" for €2,000,000 (excluding 21% VAT).
19. 15/12/2025 Cheque076: The payment from "Mega Pet Mart" becomes overdue.
20. 16/12/2025 CA066: "Mega Pet Mart" finally settles the overdue payment (Cheque076).
21. 18/12/2025: BexCo proceeds to an internal transfer of funds from the cash account to the bank account. The amount transferred is €200,000.

By carefully analyzing these scenarios and applying the principles outlined in this document, you can gain a solid understanding of how to record various commercial transactions in a company's journal. Remember to check your work with the provided journal entries. Good luck!