Introduction:
As we take a more in depth look at the accounting cycle we will examine various source documents and how the information in these documents are transferred to the books of original entry. You will also have looked at the different books of original entry.
Objectives
Upon completion of this topic you should be able to:
1. Identify different forms of source documents.
2. Transfer information from the source document to the books of original entry.
3. Examine the various books of original entry
4. State the use of the books of original entry.
Before we look any further at the books of original entry, let us look at the source documents that provide the information to be recorded in the books of original entry.
A source document describes all the basic facts of the transaction, such as the amount of the transaction; to whom the transaction was made; the purpose of the transaction and the date of the transaction. Some source documents include:
Source Document
1. Invoices
An invoice is a document that contains a detailed description of the item sold, unit price and the terms and conditions of the sale.
The invoice is numbered and gives a detailed description of the item(s) sold or purchased: the quantity, the list price per unit, trade discounts allowed and the net cost of the item. Also, included on the invoice will be the terms of payment and the name and address of the customer and the name and address of the issuing firm. A number of copies are usually made and routed to different departments within the issuing firm.
Types of Invoices
There are two types of invoices:
• Purchases Invoices - reflects credit purchases of stock (Holdip and Lamorell 2010)
• Sales Invoices - reflects credit sales of stock (Holdip and Lamorell 2010)
Discounts
A discount is a reduction in the price of an item. In order to encourage prompt payment by customers, cash discounts may be offered. Customers are allowed a specified percentage off the amount payable if paid within a stated time period. Discount Received is an allowance you receive for making prompt payment for the goods and services you receive from your suppliers. Discount Allowed is the allowance you give to your customers for making prompt payment for the goods and services they received from your business.
Trade discounts are reductions in the invoice price of the goods and are given to encourage trade and increase the volume of good purchased. Trade discounts are not recorded in the ledger accounts although they may be noted in the relevant day book. Cash discounts are recorded in the accounting records
2. Debit Notes
A Debit Note is sent by the business to the supplier giving details of a claim for an allowance in respect to goods returned. (Wood and Robinson 2007) (Illustrated below).
3. Credit Notes
The supplier will issue a credit note to the customer (debtor) showing the amount of the agreed reduction (Wood and Robinson 2007)
4. Cash Receipts
The cash receipt is a simple document of a transaction that is often issued at the time of the completion of a sale. Many businesses issue cash receipt as a matter of course. While the printed document is normally a simple record of the transaction, some examples of the cash receipt can be very detailed.
5. Cheque Stubs
A cheque instrument (usually a piece of paper) that orders a payment of money. The person writing the cheque, the drawer, usually has a chequing account where their money was previously deposited. The drawer writes the various details including the money amount, date, and a payee on the cheque, and signs it, ordering their bank, known as the drawee, to pay this person or company the amount of money stated. (Source: Wikipedia)
1. drawee, the financial institution where the cheque can be presented for payment
payee
2. date of issue
3. amount of currency
4. drawer, the person or entity making the cheque
5. signature of drawer
6. machine readable routing information
Other Source Documents
Below are some additional examples of source documents:
1. Petty Cash Vouchers – records of claims of small expenditures (Holdip and Lamorell 2010).
2. Time Cards – record of hours worked by employees (Holdip and Lamorell 2010).
3. Stock Cards – records of materials etc. Purchased (Holdip and Lamorell 2010).
4. Bank Statements – records of transactions with the bank (Holdip and Lamorell 2010).
5. Cash Bills/Invoices – given to customers and received from suppliers as proof of purchase. (Holdip and Lamorell 2010).