ZIMSEC O Level Principles of Accounts Notes: Source Documents and their uses
- Accounting is the systematic recording of financial transactions in monetary terms.
- Every time a business makes a transaction in the real world a paper trail is created.
- The paper trail is known as/are a source document(s)
- A source document is the original document that shows that a transaction took place.
- For example the evidence that a cash sale took place might be in the form of a cash receipt copy in the receipts book.
- Typically if a transaction involves outside parties i.e. people who are not part of the entity, both the entity and the outside party obtain copies of the transaction. For example if the business purchases goods for resale on credit from a trader like Mohammed Mussa, the business obtains an invoice showing the amount of goods purchased and Mohammed Mussa retains a copy of the invoice for their own accounting while the business can use their own copy of the invoice to record a purchases transaction in the books of accounts.
- Subsequently if at a later stage the business makes a payment towards that purchase they will receive a receipt as a proof of payment which they can also use as evidence in the books to record the transaction.
- Original documents usually show the following information:
- The date of the transaction.
- The amount/amounts involved.
- The people/businesses/parties involved in the transaction.
- A reference number for example an Invoice or Receipt number that can be used to trace the transaction.
- A description or summary details of the transaction for example: Sales, deposit etc.
- Source documents should be kept and retained for future reference and for audit purposes since auditors often do a sample check of source documents in order to determine whether the accounts of a business show a true and fair value of the business.
- Common source documents include: invoices,credit note,debit note,cheque,voucher, receipt, bank statements and statements of accounts. These have been extensively looked at in the commerce notes click on each to read more about it.
Importance and use of source documents in accounts
- They act as proof to show that the transaction recorded in the books of accounts has occurred.
- They show the amount, date, details and nature of the transaction as well as the people/business/parties involved.
- Are used in credit transactions e.g. credit sales (when they are issued to customers and the business retains its own copy) and credit purchases.
- They are used to record credit sales, credit purchases, the purchase of assets on credit and the sale of assets on credit.
- Credit sales invoices are recorded in the Sales Journal, Credit Purchases are recorded in the Purchases Journal and the selling and buying of assets is recorded in the General Journal.
- In all these cases an invoice acts as the source document.
- Is issued by a supplier to the customer when they have overcharged the customer or when,
- The customer has returned goods to the supplier.
- For example when the business returns damaged goods to the supplier (Purchases Returns/Returns Outwards) the supplier issues a credit note to the business and the transaction is recorded in the Purchases Journal.
- If a consumer is for some reason dissatisfied with the goods sold to him by the business and returns them. The business will issue him/her with a credit note and the transaction will be recorded in the Sales Returns Journal.
- If the customer was overcharged then he/she is issued with a credit note and the transaction will be recorded in the Sales Journal.
- In all these cases the credit note acts as a source document.
- Is issued by the supplier when they undercharged a customer.
- If the business was undercharged they will receive a debit note from the supplier and they will use this to record the transaction in the Purchases Journal.
- Conversely if the business undercharged a customer they will issue a debit order to that customer and make adjustments in the Sales Journal.
- Cheques and cheque counterfoils are used to record all bank transactions in the Sales Journal,Purchases Journal,General Journal and the Cash Book.
- These will typically include payments to suppliers and other creditors, receipts from customers and other receivables/debtors, cancelled cheques and bounced checks.
- At times vouchers are used instead of cash to make purchases for example fuel purchases.
- In such instances they are used in much the same way as cheques as evidence of payment for goods and services and recorded in the proper original book as such.
- For example a sale to a customer will be recorded in the Cash Book as a sale.
- They are also used by customers to get deals and special discounts in which case they are recorded in the Cash Book in the Discount Allowed and Discount Received columns.
- Are used as evidence of cash payments and cash receipts.
- If a general cash payment is made the transaction is recorded in the Cash Book and General Journal.
- In the event of a cash sale the transaction is also recorded in the Cashbook and General Journal.
- If a customer settles their account using cash the transaction is recorded in the Cash Book and Sales Ledger.
- If the business pays amounts owed to their suppliers using cash the transaction is recorded in the Cash Book and the Purchases ledger.
- If however it is a cash purchase the amounts are recorded in the General Journal and the Cash Book.
- Are issued by the bank to the business.
- They are used to update the Cash Book and to create a Bank Reconciliation statement.
Statement of Accounts
- Are issued to the business by their suppliers and other creditors.
- They are used to update the Purchases Journal and
- to do a Purchases Ledger Reconciliation.
NB:These are by no means the only source documents there are others including Air Waybills, Bills of Exchange etc.
To access more topics go to the Principles of Accounts page.