Purchase and Sale of Goods

The purchase and sale of goods involve systematic processes, legal protocols, and specialized documentation to ensure transactions are executed smoothly, whether in home or international trade. This guide examines trade documentation, terms of trade, and the nature of payment options.

1. Procedure and Documentation

Before a transaction is completed, a series of documents are exchanged between the buyer and the seller. Understanding these documents is essential for tracking ownership, assessing liabilities, and completing accounting records.

• Enquiry: A letter or document sent by a prospective buyer to a seller requesting information about the availability, price, and terms of sale of specific goods.
• Quotation: The seller's reply to an enquiry. It details the prices, terms of payment, delivery options, and validity period of the offer.
• Order: A formal request sent by the buyer to the seller to supply the goods specified under the agreed terms.
• Invoice: A document sent by the seller to the buyer showing details of the goods sold, their prices, total cost, and payment terms. It serves as a bill and a primary accounting record.
• Proforma Invoice: A preliminary invoice sent before goods are delivered. It acts as a polite demand for payment before dispatch, or is used for customs purposes in foreign trade to declare the value of goods.
• Statement of Accounts: A periodic document (usually monthly) sent by a creditor to a debtor summarizing all transactions (purchases, payments, returns) during the period and showing the outstanding balance.
• Indent: An order to buy goods, specifically used in international trade, sent to an agent or exporter abroad. An open indent allows the agent to choose the source/manufacturer, while a closed indent specifies the exact manufacturer.
• Consular Invoice: An invoice signed by a consul of the importing country residing in the exporter's country. It helps prevent tax evasion by verifying the true value of goods for customs duties.
• Bill of Lading: A highly important document in maritime trade. It acts as a receipt for goods loaded onto a vessel, a contract of carriage, and a document of title (ownership) to the goods.
• Certificate of Origin: A document certifying the specific country where the goods were manufactured. It is used to determine trade tariffs or preferential duty rates.
• Consignment Note: A document used when goods are sent via a carrier. It is signed by the carrier and the recipient as proof that the goods were delivered and received in a specified condition.
• Debit Note: Sent by the seller to correct an undercharge in the original invoice, thereby increasing the buyer's liability.
• Credit Note: Sent by the seller to correct an overcharge, or when goods are returned, thereby reducing the buyer's liability.

2. Terms of Trade

Terms of trade outline the discounts, guarantees, and delivery responsibilities agreed upon by the transacting parties.

• Trade Discount: A deduction from the catalogue or list price of goods given by manufacturers or wholesalers to retailers. It allows retailers to sell at the list price and still make a profit. It is deducted before recording transactions.
• Quantity Discount: A deduction given to buyers who purchase large volumes of goods.
• Cash Discount: A deduction given to encourage buyers to pay their bills promptly within a specified period (e.g., 2% if paid within 10 days). It is calculated on the net price after deducting the trade discount.
• Warranties: Written guarantees from a manufacturer or seller promising to repair or replace a defective product within a specified time frame.
• C.O.D. (Cash on Delivery): A term specifying that payment must be made at the exact time the goods are physically delivered to the buyer.
• C.I.F. (Cost, Insurance, and Freight): A shipping agreement where the seller's price includes the cost of the goods, marine insurance, and freight charges to the destination port.
• F.O.B. (Free on Board): A shipping term where the seller pays all costs and assumes all risks up to the point where the goods are loaded onto the transport vessel. Once on board, responsibility shifts to the buyer.
• E. & O.E. (Errors and Omissions Excepted): A disclaimer printed on invoices indicating that the seller retains the right to correct any clerical errors or omissions discovered later.

3. Terms of Payment

Payment terms dictate how and when a buyer must settle their debt.

A. Cash - Legal Tender

Cash is immediate settlement using physical currency. Legal tender is any form of money (banknotes and coins) that is recognized by law as legally acceptable for settling a public or private debt. In Nigeria, the Naira and Kobo are the official legal tenders.

B. Credit

Credit involves acquiring goods or services immediately while promising to pay for them at a future date.

Types of Credit:

• Hire Purchase: A credit system where the buyer pays a deposit and takes possession of the goods, making regular installment payments. Crucially, ownership of the goods remains with the seller until the final installment is paid.
• Deferred Payment: Similar to hire purchase, but ownership transfers to the buyer immediately upon signing the contract or making the first payment.
• Credit Sales: Selling goods on short-term credit, where ownership transfers immediately and the buyer is billed later.
• Bank Overdraft: A bank facility allowing current account holders to withdraw more than their actual balance up to an agreed limit.
• Mortgage: A long-term loan specifically used to purchase real estate, where the property itself serves as collateral.
• Trade Credit: An agreement where a manufacturer or wholesaler allows a retailer to defer payment for goods for a set period (e.g., 30 to 90 days).

Merits and Demerits of Credit Transactions:

To the Seller:
Merits: Increases sales volume, attracts more customers, and allows them to charge higher prices.
Demerits: Risk of bad debts (non-payment), capital is tied up, and higher administrative costs for debt collection.

To the Buyer:
Merits: Allows immediate enjoyment of goods, facilitates business expansion using credit, and helps during financial emergencies.
Demerits: Encourages overspending/impulse buying, goods can be repossessed (especially under hire purchase), and products often cost more due to interest charges.