Purchasing cycle and documentation - Purchase orders, GRNs, ...

Learning Outcomes

After reading this article, you will be able to describe each stage of the purchasing cycle and explain the purpose and content of key documents such as purchase orders, goods received notes (GRNs), supplier invoices, and credit notes. You will understand how to check and process these documents, recognise their roles in controlling purchases, and accurately record purchase transactions for ACCA exam purposes.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand the documentation used in the purchasing process and how it underpins reliable accounting records. In particular, you should revise:

• The main documents used to support purchases of goods and services
• The stages of the purchasing cycle, from ordering to authorisation and payment
• The checks and controls applied at each stage to prevent errors and fraud
• The function, content, and sequence of purchase orders, goods received notes, purchase invoices, and credit notes
• The requirements for authorising, matching, and coding purchase documentation
• How to process supplier credits and purchase returns

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following documents should authorise the purchase of goods before any order is placed?
   1. Delivery note
   2. Purchase order
   3. Purchase requisition
   4. Credit note
2. What is the main purpose of a Goods Received Note (GRN)?
   1. To allow payment to be made immediately
   2. To record items delivered and their condition
   3. To request goods from a supplier
   4. To document a price quotation

3. True or false? A credit note always increases the amount a business owes to a supplier.

4. List the three documents that should be matched before a purchase invoice is paid.

Introduction

Purchasing goods and services on credit is a core business activity. Effective control and accurate recording rely on the correct use of documentation at every stage. Each type of document—from authorising a purchase to receiving goods and verifying invoices—forms part of a control system that ensures only genuine and accurate transactions are recorded and paid.

This article explains the purchasing cycle and sets out the use and checking of purchase orders, goods received notes (GRNs), supplier invoices, and credit notes, with a focus on their purpose and best practice for ACCA students.

Key Term: Purchasing cycle
The sequence of steps and controls followed by a business when ordering, receiving, and paying for goods or services.

PURCHASING CYCLE OVERVIEW

The purchasing cycle describes the end-to-end process from identifying a business need to paying the supplier. Each stage has a supporting document to control and record transactions. The key stages are:

1. Purchase authorisation
2. Raising a purchase order
3. Receipt of goods (with a GRN)
4. Checking and authorising the supplier invoice
5. Dealing with purchase returns and credits

Key Term: Purchase requisition
A formal internal request to buy goods or services, often requiring approval.

Key Term: Purchase order
A written order sent to a supplier specifying the goods or services required, quantities, prices, and terms.

Key Term: Goods Received Note (GRN)
An internal document confirming receipt of goods or services, recording quantities, dates, and any discrepancies.

Key Term: Purchase invoice
A document issued by the supplier requesting payment for goods or services delivered.

Key Term: Credit note
A document from the supplier reducing the amount owed, usually due to returned goods or an invoice error.

KEY STAGES AND DOCUMENTS

1. Purchase Authorisation and Purchase Requisition

Purchases should only be made when authorised by the business. An employee completes a purchase requisition form, which describes the need and quantity. A manager or person with sufficient authority checks and approves the requisition.

2. Purchase Order

Once authorised, a purchase order (PO) is created and sent to the chosen supplier. The PO is legal evidence of the order and must be uniquely numbered. A copy is retained for later matching and control.

3. Delivery and Goods Received Note (GRN)

When goods arrive, the delivery is checked against the PO. The recipient prepares a Goods Received Note, recording the quantities delivered, condition of goods, and delivery date. Discrepancies are noted on the GRN and reported promptly.

4. Supplier Invoice

After delivery, the supplier sends an invoice requesting payment. The invoice details quantities, prices, and payment terms. The accounts department matches the invoice to the PO and GRN to check that items, prices, and quantities agree before payment is authorised.

5. Credit Notes and Purchase Returns

If goods are returned or an overcharge is discovered, the supplier issues a credit note to adjust the outstanding amount. The credit note must be checked for accuracy and matched to the original invoice before being processed in the accounting records.

Worked Example 1.1

A company orders 50 printers from Max Supplies Ltd using purchase order number 1051. On delivery, 48 printers are received, and the GRN records this shortfall. The supplier later issues an invoice for 50 printers.

Question: What actions should the accounts department take before approving payment?

Answer:
The accounts department should match the invoice with the PO and GRN, note the two missing printers, and contact the supplier to request a corrected invoice or credit note for the shortfall before making payment.

Worked Example 1.2

The purchasing team returns 10 boxes of paper to a supplier due to damage. The original invoice was for 100 boxes. A credit note for the 10 returned boxes is received.

Question: How should this credit note be checked and used in the accounting system?

Answer:
The credit note should be checked to ensure it matches the return (10 boxes), compares with the original invoice, and only reduces the amount payable for those boxes. The accounts team should process the credit note before settling the outstanding balance.

Exam Warning

An invoice must never be authorised for payment until matched against both the purchase order and GRN. Paying incorrect or unmatched invoices is a common source of fraud or error in the accounting system.

Checks and Controls Over Purchases

At each stage, controls prevent unauthorised spending and errors:

• Only authorised staff can approve purchase requisitions and orders.
• Purchase orders are uniquely numbered and retained for audit.
• Goods received are checked for damage or shortages; discrepancies are recorded on the GRN and reported.
• Invoices are checked against GRNs and POs before payment is approved.
• Returns must be tracked, and credits processed before payment is made.

Key Term: Three-way match
The control process of matching a purchase order, GRN, and supplier invoice before approval of payment.

Coding and Filing Documentation

All purchase documents should include references to supplier account codes and relevant general ledger account codes. Documents are filed in an order (usually by supplier or date) that makes retrieval for audit or dispute straightforward. Documents should be retained according to the business retention policy and kept secure.

Summary

The purchasing cycle uses specific documents at every stage to provide evidence, control, and an audit trail. Authorised requisitions lead to purchase orders, which, when fulfilled, prompt the preparation of a GRN, invoice matching, and, if necessary, credit notes for returns. Each standard document protects against errors and unauthorised transactions.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the purchasing cycle and its importance in controlling business expenditure
• Describe the purpose and content of purchase requisitions, purchase orders, GRNs, purchase invoices, and credit notes
• Identify and apply controls at each stage to prevent errors and fraud
• Match purchase documentation (PO, GRN, invoice) before authorising payment
• Explain how to process supplier credits for returns and errors

Key Terms and Concepts

• Purchasing cycle
• Purchase requisition
• Purchase order
• Goods Received Note (GRN)
• Purchase invoice
• Credit note
• Three-way match