What is Trade Transaction? Steps in Trade Transactions

What is Trade Transaction? Meaning

Trade transaction means the activity of buying and selling in between two parties, namely Buyer and Seller.

The consideration for which a trade transaction takes place is called Price.

Image Credits © Brendan Reynolds

Such trade transaction would materialise only when one party is willing to buy and another party is willing to sell. Such parties have to take a series of steps in order to complete a trade transaction.

Steps in Trade Transactions

A transaction of purchase or sale of goods involves a number of stages. Every trader, before buying or selling goods takes all the necessary precautions to get the best result of a trade transaction.

The procedure begins with the enquiry from prospective buyer's side and ends with the payment of price by the buyer.

However, in between these two steps, there are many other steps, like:-

Step 1. Enquiry or Prospect

Trade transactions start with this step. It is a request made by a prospective buyer to a seller, relating to the goods, he is interested in buying.

The buyer generally enquires about:-

1. The quality, size, shape, design, packing, etc.
2. The quantity.
3. Time and place of delivery.
4. Price and terms of payment, credit period, discount, etc.
5. Sample, price lists, catalogues, etc.

Enquiries may be verbal or in writing. An enquiry is also described as a 'PROSPECT'.

Step 2. Quotation or Offer

A quotation is a reply to an enquiry. It is an offer made by the seller to the prospective buyer, to sell his goods at certain terms and conditions. A quotation must be sent quickly and it must cover all the points of an enquiry. Along with the quotation, samples, catalogues and other sales literature may also be sent.

Quotation is normally given in a prescribed form and includes the following information:-

1. Quality and quantity of goods offered for sale,
2. Sale price per unit and discount, if any,
3. Time, mode and place of delivery,
4. Terms of payment,
5. Details of duties, Octroi and taxes payable,
6. Mode of transport and details of packing, labelling, etc.

Step 3. Acceptance or Placing an Order

Order is an acceptance of the offer or quotation by a buyer. As soon as the quotations are received from various dealers, the buyer has to select the best and the most suitable quotation for obtaining his requirements. He will make comparative study of various quotations and select one among them. As soon as a particular quotation is approved, an order is placed with the dealer whose quotation is accepted either orally or in writing.

Generally, printed order forms are used by the buyer. Order form contains:-

1. Quantity, quality of the goods.
2. Rate and total cost, terms of payment.
3. Time & place of delivery, mode of delivery, types of packing required, etc.

Step 4. Acknowledgement and Status Enquiry

After receiving the order, the seller enters it in the order books and gives the acknowledgement to the buyer immediately.

In case of new customers asking for credit, it becomes necessary to enquire about his reputation and creditworthiness. The usual sources of knowing the creditworthiness of a new customer are trade references, bankers references. published information, etc.

If the seller is satisfied about the creditworthiness of the buyer, he proceeds to execute the order, otherwise the order is rejected. But if the order is received from a regular customer, there is no need to conduct any status (creditworthiness) enquiry about him. This eliminates the risk of bad debts.

Step 5. Execution of an Order

If the seller is not satisfied with the creditworthiness of the prospective buyer, he may reject the order by giving an excuse in a decent manner. But if he is satisfied with the status of the customer he should acknowledge the receipt of order. When the execution of an order is going to take some time, the seller writes to the buyer acknowledging the receipt of an order.

Execution of an Order involves the following steps:-

1. Intimation to warehouse keeper.
2. Packing and Despatching of goods.
3. Issue of delivery note.
4. Arrangement of transportation of the goods, etc., (Traffic department).

Step 6. Invoicing

An invoice is a document giving the particulars of goods sold to the customers and the total amount due from them. It is sent by the seller to the customer immediately after the despatch of the goods or along with the goods depending upon the practice of the seller. An invoice is a bill for the goods sold on credit. It is usually a printed form which includes details related to the quality, quantity of goods, etc.

Step 7. Complaints and Their Adjustments

After receiving the delivery of the goods, buyer compares the goods with the order. If there is any discrepancy he will inform about it to the seller.

The complaints are generally made due to the following reasons:-

1. Supply of defective goods.
2. Delay in executing order.
3. Defective packing.
4. Charging higher prices.
5. Mistakes in totals, calculations, etc.
6. Supply of excess or less quantity.
7. Damage to goods sent.

Such complaints should be settled through peaceful negotiations or by using debit and credit notes.

Step 8. Collection of Payments or Sale Proceeds

It is the last step or stage in trade transaction. In case of cash sale, the amount of goods sold is collected immediately. In case of a credit sale, the seller sends a statement of account to the buyer. On receiving this statement, the buyer may send cheque or draft for settling the account.