Introduction to source documents

In level one of this accounting tutorials, transactions were directly posted to the respective ledger accounts for the sake of understanding the concept of double entry. However in real accounting practice, the accountant has to consider some initial steps of the transactions in question. The first step is to record business transaction in a source document. In this section, we will define this document and further interrogate the various types used by business men/women. For some documents, the author has highlighted the details in those documents. However, the full details for every document are shown at the stage of discussing the link between source document and books of original entry. 

What is a source document in accounting?

A source document is a note where a transaction is recorded when it immediately takes place. The moment two or more parties engage in a transaction that can be assigned a monetary value, this transaction need to be written down on a document to imply a transaction has taken place. Also, the source document will be used for future evidence that a transaction took place on a particular time and is authentic. Therefore the document captures the key details of the transaction such as date, names of the parties involved, amount paid or to be paid in the future and the transaction substance. A unique number is used for future reference. At this point, the learner need to note that the GAAP principle of Verifiable Objective Evidence is paramount. It states that accounting data must be verified. In other words, documentary evidence of transactions must be made which are capable of verification by an independent party. Failure to verify such accounting data implies that it is not reliable and or not dependable, i.e., is biased data. Verifiability and objectivity express dependability, reliability and trustworthiness that are very useful for the purpose of displaying the accounting data and information to the users.

Uses of Source documents

Source documents have several uses which include and not limited to;

1. Evidence for future reference that a transaction took place

2. Audit trailing; source document is used during audit process hence make audit easy and time saving

3. Improve transparency and accountability. When an employee especially knows there is strict adherence to book keeping practices such as recording of transactions in a source document, this makes him or her be straight forward in ensuring the right thing is done.

4. Correction of errors. Information recorded in the source document can be of help when errors has occurred especially during posting of transactions to the ledger accounts.

5. Source of information to be transferred to the books of original entry before posting the same to the right ledger accounts.

Types of source documents

There are many types of source documents that a business uses from the time of enquiring of the available goods or services from the potential sellers up to the point of ordering the goods from the identified seller and thereafter. Apart from such documents, related to purchase of goods or services, there are other source documents related to day to day operations of the business which will also be explained in this section. Further, the specific types of source documents depends on the nature of business under evaluation. For the source documents affiliated to buying and selling of goods or services, in this section, we will consider each one of them following systematic steps starting with the documents that are used in the initial stages of transaction process (ordering of the goods by the buyer) up to when the goods are paid for. So we will consider each step and the relevant documents used. The day to day operational activity related source documents, will thereafter be discussed. This documents are described as follows as per each step;

• Step one: Ordering of goods by the potential buyer

  The appropriate document used is purchase order;

  1. Purchases Order

     It is a document prepared by the buyer of goods which is sent to the seller/supplier to order goods as per the specifications of the former. This document is prepared after the potential buyer has considered several suppliers and has now settled on a particular one. Therefore, the document contains the details of the nature of goods the buyer wants. It is the document that initiates the other transactions between the buyer and the seller. If the ordering is locally made (buyer and seller) are within the country, the document is referred to as Local Purchase Order (LPO). If the goods are ordered from other countries, the document is referred to as Overseas Purchase Order (OPO). 

• Step two: Physical delivery of the goods by the supplier

  Once the seller receives the request to supply the goods to the buyer, he packages the goods per the purchase order and sends them to the respective buyer. In accompaniment, the seller prepares a delivery note

  1. Delivery note

     It is a document prepared by the seller who then sent it to the buyer of goods as an evidence that goods have been dispatched in good order. When the document is simultaneously received together with the goods, the buyer counter checks whether the details in the delivery note is the same as per the goods supplied and also as per the purchase order details. Once the buyer confirms that the goods are in good condition, he or she confirms the same by preparing a goods received note.

  2. Goods Received Note

     Goods received note is the document prepared by the buyer of goods to affirm that the goods were received as indicated in the delivery note and they are in good order. So this document is a response to the seller’s delivery note. It acts as an acknowledgement note that the goods were received and no cases of discrepancies.

• Step three: Demand for Payment by the Seller

  If there are no discrepancies, the next step is to pay for the goods. Hence the seller writes to the buyer an invoice demanding for payment.

  1. Invoice:

     An invoice is a document prepared by the seller to the buyer to claim payment for goods that had been sold on credit. An invoice is classified in to two categories depending on who is buying and selling the goods for the business of our focus can either be a seller or a buyer of goods or services. Ie, it is directional for it can originate from the business of our focus or from a supplier who sold goods or services to the business. The two categories are; sales and purchases invoice;

     1. Sales invoice:-This refers to a note written by seller to the buyer claiming for payment for goods sold on credit. It is also referred to as outgoing invoice for it is sent by the seller to the buyer. As the seller prepares this document, he serializes for recording purpose. The note contains the following details;

        -Name and postal address of the supplier (seller) and customer (buyer)

        -Date when the seller sold the goods

        -Narration of nature of goods sold in terms of type, quantity etc

        -Price per unit and the total amount

        -Amount of sales tax charged such as Value Added Tax (VAT)

        -Terms of sale, for example types of discount provision

     2. Purchases invoice:- This refers to a note received by the buyer from the seller  claiming to be paid for goods supplied on credit. It is also referred to as incoming invoice for it is received by the buyer form the seller. So the business receiving the note does not need to re-number it. The note contains the following details;

        -Name and postal address of the supplier (seller) and customer (buyer)

        -Date when the seller sold the goods

        -Narration of nature of goods sold in terms of type, quantity etc

        -Price per unit and the total amount it translates to

        -Amount of sales tax charged such as Value Added Tax (VAT)

        -Terms of sale, for example types of discount provision

        The learner need to notice that a sales invoice and purchases invoice is one and the same document. The difference is directional, that is we name or identify the document based on the point where it originating from.

  NB: That goods sold/bought may have some discrepancies such as wrong calculation of invoice value (either over or under charge), physically damaged goods or other reasons. Whichever way, the business affected prepares a damaged goods note and sends it to the seller or the buyer to adjust the error.

• Step four: Goods Undervalued

  1. Credit note:

      

     As a learner in this tutorial series you need to understand that sometimes when goods are sold, they may be having some discrepancies such as wrong addition of the total amount to be claimed, or packaging of excess goods than it was in the purchase request or goods packaged and delivered by the seller may be of a higher/lower quality or standard than what the buyer had ordered. In such circumstance, the seller will prepare a credit note to correct that anomaly.

     Credit note is a document prepared by the seller to the buyer to show the additional amount of money to be added on top of what was indicated in the sales invoice. This happens when the sales invoice (ie outgoing invoice) was erroneously under stated. Therefore, a credit note is also known as additional sales invoice for the aim of its preparation is to forward it to the buyer to correct a mistake of undercharge.

• Step five: Goods Returned by the buyer

  1. Debit note

     A debit note is a document prepared by the seller to the buyer to correct an overcharge case in the sales invoice. This happens when the sales invoice was erroneously overstated. Therefore, a debit note is used to correct a case of overcharge. As a learner you need to understand that a debit note is the opposite of a credit note and the aim of preparing it is to highlight the damaged goods and the monetary value thereof so that both parties can adjust the sales invoice downwards. A debit note can be classified as incoming or outgoing debit note based on where the document originates from. If the note is written by the seller the business we are focusing on, then it is referred to as the incoming debit note. Whereas, if it emanates from the business to the buyer, it is referred to as an outgoing debit note.

• Step Six: Actual Payment of goods

   

  Once the buyer is satisfied with goods supplied, he makes the payment either through the banks or cash. In exchange the seller of the goods will issue a receipt

  1. Cash Receipts

     This is a document issued by one party (ie the seller) after actual receipt of cash or check from another party (the buyer) for goods or services sold on credit or in cash (spot). This document contains the following details;

     • Name of customer
     • Date when cash or check was received
     • the amount of cash/check received (In words and figures)
     • Signature of the Receiver

• Step seven: Other Source documents for general purposes

  NB: The following section interrogates the source documents related to administrative issues or day to day business operations, this documents are;

  1. Cash Payment Vouchers

     It is a note or document used to provide an evidence that a payment has been made for goods or services supplied to the business in question. It is an authentic certificate for payment and it is usually checked and authorized by an accountable or an officer in authority before cash can be paid. Each business can prepare a unique document to be used when payment has been made by a third party. An example of a payment voucher is salary pay slip. It should be noted that the amount to be paid using this document has a threshold or a minimum level which depends on an individual organization. But generally, the amount to be paid in this case should be substantial or material and also the intervals between one payment and the other is reasonably long otherwise a petty payment voucher will be used.

  2. Petty Cash Voucher

     A petty payment voucher plays the same role as that of payment voucher only that the amount paid is in small or immaterial form and again the payment is done frequently like on daily basis. For instance, every day, there may be small payments for items such as tea leaves, credit cards, sugar, salt and postage.

  3. Bank Pay in Slip

     It is a document that is issued by the bank to the customer for cash or check deposit purposes. These slips are of two categories, namely; one, cash deposit pay in slip; and two, check pay in-slip. The cash pay in slip is used by the customer when making cash payment and the slip provides options for recording the cash in a systematic manner based on the currency denominations. Whereas, the check deposit pay in slip is used for check deposit.

  4. Check Counterfoils

     It is a document issued by the bank when check has been deposited into the bank. It does not matter the reason of depositing the money in the bank for it can either be for safety purpose (savings) or the person depositing may be making a payment through the bank. Therefore, after payment is accomplished, the bank issues a written evidence which can be used for future references.

  5. Monthly bank statements

     Bank statement is a document prepared and issued by the bank to its customers showing the summary of all the transactions that took place between the bank and the customer within a particular period of time. Usually, it is a month’s duration unless the customer requests for the statement for a shorter period of time.

  6. Minutes for a Meeting

     It is a document that entails details of meeting resolutions made over certain matters of discussion. It is commonly used by the management in meetings and it shows the agenda of the meeting held and the minutes noted down and the guidelines on what should be done. For example, the minutes may indicate what the organization is supposed to buy or sell and the specifications thereof. This document acts as evidence for authorization of the transactions to be undertaken in the future.

  7. Authority to Incur Expenditure (AIE)

     It is a document to authorize a person in management to such as a Chief Executive Officer (CEO) to discretionally spend a certain amount of money for furthering the success of the business. One unique thing about this document is that, the person permitted to spend a limited amount as specified in the document is not accountable of how he or she has spent the money. It is a common practice in big organizations and learning institutions.