Key Concepts

Habari Mwanafunzi! Unlocking the Secrets of Business Paperwork

Welcome back, future business tycoon! Ever seen your parents look at a receipt from Naivas and check it carefully? Or heard a shopkeeper on River Road talking about an "invoice"? These pieces of paper are the language of business, and today, we're going to learn how to speak it fluently. These aren't just boring documents; they are the story of every sale, every purchase, and every shilling earned. Let's decode them together!

1. Trade Discount: The "Best Price" for a Friend

Imagine you own a small electronics shop in Luthuli Avenue. You buy your phones in bulk from a big supplier. Because you buy so many, the supplier gives you a special, lower price than the one they show on the price list. That's a Trade Discount!

• It's a reduction on the catalogue price (the official listed price).
• It's given by a producer or wholesaler to a retailer to encourage them to buy in large quantities.
• It is NOT recorded in the books of accounts. We only record the final price (the net price).

Scenario: Juma owns a hardware store in Kisumu. He orders 100 bags of cement from Bamburi Cement. The list price for one bag is Ksh 700. Because Juma is a regular, bulk buyer, Bamburi gives him a 10% trade discount.

Calculating Trade Discount

Let's do the math for Juma's order. It's simple, I promise!

Step 1: Calculate the total list price.
   100 bags * Ksh 700/bag = Ksh 70,000

Step 2: Calculate the trade discount amount.
   10% of Ksh 70,000
   (10 / 100) * 70,000 = Ksh 7,000

Step 3: Calculate the final price (Invoice Price).
   List Price - Trade Discount = Invoice Price
   Ksh 70,000 - Ksh 7,000 = Ksh 63,000

So, Juma will be invoiced for Ksh 63,000, not Ksh 70,000!

Image Suggestion: A friendly Kenyan supplier at a warehouse in Industrial Area, Nairobi, shaking hands with a small shop owner. In the background, there are boxes of goods. The scene should look cooperative and positive, illustrating a good business relationship.

2. Cash Discount: The Reward for Being Quick!

Now, let's go back to Juma. Bamburi has sent him an invoice for Ksh 63,000. On the invoice, it says "Terms: 5% 10 days, net 30". What does this mean? It's an offer! If Juma pays his bill within 10 days, he can take an additional 5% off. If he waits longer, he must pay the full Ksh 63,000 within 30 days. This incentive for early payment is the Cash Discount.

• It's a reduction on the invoice price.
• It's offered to encourage prompt payment from debtors (people who owe you money).
• It IS recorded in the books of accounts as an expense (for the seller) or income (for the buyer).

Calculating Cash Discount

Juma is smart and wants to save more money, so he decides to pay on the 5th day.

Step 1: Start with the Invoice Price (after Trade Discount).
   Invoice Price = Ksh 63,000

Step 2: Calculate the cash discount amount.
   5% of Ksh 63,000
   (5 / 100) * 63,000 = Ksh 3,150

Step 3: Calculate the final amount Juma pays.
   Invoice Price - Cash Discount = Amount Paid
   Ksh 63,000 - Ksh 3,150 = Ksh 59,850

By paying early, Juma saved an extra Ksh 3,150! Hiyo ni pesa ya lunch ya wiki!

Visualizing the Discount Flow

Remember this simple flow. It's very important!

+-------------------+
|  Catalogue Price  |  (e.g., Ksh 70,000)
+-------------------+
          |
          |  LESS: Trade Discount (e.g., 10%)
          V
+-------------------+
|   Invoice Price   |  (e.g., Ksh 63,000) <-- This is the amount on the bill
+-------------------+
          |
          |  LESS: Cash Discount (if paid early, e.g., 5%)
          V
+-------------------+
|    Amount Paid    |  (e.g., Ksh 59,850)
+-------------------+

3. Important Terms of Sale (The Fine Print)

When you get a document like an invoice, you'll see some letters and phrases. They are the rules of the game! Let's learn a few common ones.

• E. & O.E. (Errors and Omissions Excepted): This is like the seller saying, "Oops! If I made a mistake on this document, I have the right to correct it later." It protects them from small mathematical errors.
• C.O.D. (Cash on Delivery): You pay the moment you receive the goods. Think of when the Glovo or Jumia rider brings your food or package. You pay them via M-Pesa or cash right there and then. No payment, no package!
• Net 30: This means the full amount of the invoice is due within 30 days. There's no discount for early payment, but you have a 30-day credit period.

Image Suggestion: A close-up of a professionally designed invoice from a fictional Kenyan company like "Maisha Bora Supplies Ltd.". The invoice should clearly show the buyer's details, item descriptions, quantities, prices in Ksh, and a footer section with terms like "E.&O.E." and "Payment Terms: 2% 10, Net 30".

4. When Things Go Wrong: Credit & Debit Notes

Business is not always perfect. Sometimes mistakes happen. That's where these two documents come in to save the day.

Credit Note (The "Sorry, we overcharged you" note)

A Credit Note is a document sent by the seller to the buyer to correct an overcharge. It reduces the amount the buyer owes.

Scenario: Maria, who runs a uniform shop, ordered 10 rolls of fabric. The supplier accidentally invoiced her for 11 rolls. After Maria calls them, the supplier sends a Credit Note for the value of 1 roll of fabric. This means Maria's debt is now reduced.

Reasons for a Credit Note:

• An overcharge on the invoice.
• Goods were returned by the buyer because they were damaged or the wrong type.
• An allowance was given for poor quality goods that the buyer decided to keep.

Debit Note (The "Oops, we undercharged you" note)

A Debit Note is the opposite. It's sent by the seller to the buyer to correct an undercharge. It increases the amount the buyer owes.

Scenario: The supplier for Maria's shop forgot to include the delivery fee on the original invoice. They will send Maria a Debit Note to add this cost to her bill. This means Maria's debt has now increased.

You've done an amazing job today! These concepts are the building blocks of accounting and managing any business, from a small roadside kiosk to a giant corporation. Keep practicing, look at real receipts and invoices around you, and you'll become a master in no time. Keep up the great work!