1.3Recording purchases, sales & invoices
The essentials in 30 seconds
- Sale: debit “receivables” (claim), credit “sales” (income) + credit output VAT (owed to the State).
- Purchase: debit “purchases” (expense) + debit input VAT (recoverable), credit “suppliers” (debt).
- Excl. VAT + VAT = incl. VAT: sales and purchases only record the excl.-VAT amount; VAT, neither expense nor income, goes through dedicated accounts.
Running case — Rachid sells and restocks
Rachid invoices a customer (claim, income, output VAT) then receives his own supplier's invoice (expense, input VAT, debt). His accountant shows him the two mirror three-account double-entries — and warns him: never record incl.-VAT as income, and don't confuse invoice (the right) with payment (settlement, in 1.5). The SME's daily life fits in these two entries.
Sequel to cases 1.1–1.2 — Rachid posts his first everyday entries.
1. The sales invoice
A sales invoice records: a receivable from the customer (debit "customers"), the revenue (credit "sales") and the output VAT (credited, because it is owed to the State).
2. The purchase invoice
A purchase invoice does the opposite: the expense (debit "purchases"), the input VAT (debited, because it is recoverable) and the debt to the supplier (credit "suppliers").
3. VAT, an intermediary
The total including tax (TTC) breaks down into amount excluding tax (HT) + VAT. For the business, VAT is neither an expense nor revenue: it collects it for the State and deducts what it has paid — an "intermediary" (1.4), hence separate VAT accounts.
These standard entries cover most of day-to-day accounting (double entry with three accounts).
🔎 Concrete example — 🔎 Concrete example — A sale at €120 incl. VAT
Break down HT + VAT.
Sale €120 incl. VAT (100 HT + 20 VAT):
Debit "customers" 120 ; Credit "sales" 100 ; Credit "output VAT" 20.
→ receivable from the customer, real revenue = 100 HT, 20 owed to the State.Result: the day-to-day entries are mastered.
Reflex: sales/purchases only record the HT.
Section vocabulary
- Sales invoice
- Document recording a sale; entered as customer claim, income (sale) and output VAT.
Simple example: Rachid invoices his customer: claim on debit, sale and output VAT on credit.
What it is not: the customer's payment — which will settle the claim later.
Reflex: invoice issued = claim recorded, even if unpaid.
- Purchase invoice
- Document recording a purchase; entered as expense (purchase), input VAT and supplier debt.
Simple example: Rachid's supplier invoices: expense and input VAT on debit, debt on credit.
What it is not: paying the supplier — a second entry, at payment.
Reflex: invoice received = debt recorded, even if unpaid.
- Output VAT
- VAT charged to customers on sales, owed to the State (credited).
Simple example: On his sale, Rachid collects VAT he must pay over.
What it is not: income enriching the business.
Reflex: output VAT is not yours: it is owed.
- Input VAT
- VAT paid to suppliers on purchases, recoverable from the State (debited).
Simple example: On his restocking, Rachid recovers the VAT paid.
What it is not: a final expense like the others.
Reflex: input VAT is recovered: it reduces VAT payable.
- Excl. VAT / Incl. VAT
- Excluding-VAT amount (excl.) + VAT = including-VAT amount (incl.).
Simple example: 100 excl. + 20 VAT = 120 incl. on Rachid's sale.
What it is not: the incl.-VAT amount recorded as income.
Reflex: always break down before recording.
In practice — In practice — Recording purchases and sales
- For a sale: debit the customer (receivable), credit the sale (revenue) and the output VAT (owed to the State).
- For a purchase: debit the purchase (expense) and the input VAT (recoverable), credit the supplier (debt).
- Break down each invoice: HT + VAT = TTC; VAT goes through dedicated accounts.
- Check the debit = credit balance and repeat on several invoices to anchor the reflexes.
Ready-to-say script — explaining an invoice to the accountant (30 s)
“Here is the invoice: so much excl. VAT, so much VAT, so much incl. VAT. For a sale, customer on debit, sale and output VAT on credit. Check my balance and tell me the excl. VAT is indeed the income.”
Say it with each invoice sent: excl., VAT, incl. announced + proposed entry direction.
Copy-paste template — invoice breakdown sheet
INVOICE (sale / purchase) No.: _______________
EXCL.-VAT AMOUNT: _______________ | VAT: _______________ | INCL. VAT: _______________
SALE → Debit receivables _____ / Credit sales _____ / Credit output VAT _____
PURCHASE → Debit purchases _____ / Debit input VAT _____ / Credit suppliers _____
BALANCE debits = credits? YES / NOSmall business / tight budget
Few invoices: one breakdown sheet per invoice, filed with the document, is enough before monthly entry.
Algiers trading SME
High buy-and-resell volumes: break down by batch and match each supplier invoice to its delivery note before recording.
Cash sales
Customer pays at once: still post the invoice (claim) then the payment (1.5) — two entries, even on the same day.
With an external accountant
Rachid sends invoices + excl./VAT/incl. breakdown sheets; the accountant checks and enters — demand feedback on gaps.
✓ Best practices
- Always break down the invoice: HT + VAT = TTC.
- Record VAT through its dedicated accounts (neither expense nor revenue).
- Distinguish the invoice (receivable/debt) from the payment (1.5).
✗ Common pitfalls
- Recording the TTC as revenue/expense instead of the HT.
- Forgetting the VAT (unbalanced or wrong entry).
- Confusing output VAT (sales) and input VAT (purchases).
Key takeaways
- Sale: debit customer (receivable), credit sale (revenue) + credit output VAT (owed to the State).
- Purchase: debit purchase (expense) + debit input VAT (recoverable), credit supplier (debt).
- VAT is neither an expense nor revenue: the business collects it and deducts it (intermediary for the State).
- Each invoice breaks down into HT + VAT = TTC; the entries follow double entry with three accounts.
48h Challenge — apply tomorrow
Take 1 real invoice (sale or purchase), break it into excl. VAT + VAT = incl. VAT with the sheet above and post the three-account entry. Is the income (or expense) indeed the excl.-VAT amount?
- I can post a sale entry (receivable/sale/output VAT).
- I can post a purchase entry (purchase/input VAT/supplier).
- I break every invoice into excl. VAT + VAT = incl. VAT without recording incl. VAT as income.
Frequently asked questions
Why does VAT appear in a separate account and not in purchases/sales?
Because, for the business, VAT is neither an expense nor revenue: it is only a collector for the State. When you sell €120 incl. VAT (100 HT + 20 VAT), the real revenue is €100 (the HT); the €20 of collected VAT does not belong to you, you will have to pay it over. Likewise, on a purchase, the VAT paid is recoverable (deductible): it is not a cost. VAT is therefore isolated in dedicated accounts (collected, deductible), separate from sales (revenue) and purchases (expenses) which only record the HT. This separation makes it possible to calculate what has to be paid over (output VAT − input VAT, 1.4). Understanding that VAT "passes through" without being a gain or a loss is essential.
Do you record the invoice or the payment?
Both, but they are distinct moments. Under accrual accounting (the standard), you first record the invoice as soon as it is issued/received, which records the sale/purchase and the receivable (customer) or the debt (supplier), regardless of the payment. Then, at payment (often later), a second entry settles the receivable/debt against the bank (1.5). The invoice creates the right/obligation, the payment settles it. This separation lets you track customers who have not paid yet and suppliers to settle — crucial information. Very small structures may use cash-basis accounting (only payments), but accrual accounting is the standard.
On Rachid's €120 incl.-VAT sale (€20 VAT), what amount goes to “sales” income?