To complete the accounting records, a bookkeeper needs to have source documents to work from. These documents show the financial effects of transactions.
This section provides an overview and description of the source documents themselves. They come in many shapes and sizes, but they can be split into three categories.
The key source document relating to credit sales made by the business is the invoice.
When a business delivers goods or provides services and allows the purchaser time to pay (in other words, makes a credit sale) it will issue an invoice.
The invoice sets out the goods or services provided, gives the name and address of the purchaser and supplier, states the amount due (separately identifying any VAT), and normally gives a date or time limit for payment.
However, consider the following: What if a customer complains that despite billing them for 1,000 units, you only sent 900?
In this scenario, the customer may issue a debit note. A debit note formally sets out the shortfall and the amount that the customer thinks should be offset against the bill.
Whether or not the customer issues a debit note, the response of the business (if it believes the complaint is justified) is to issue a credit note.
A credit note looks similar to an invoice, but it states that the amount owed to the business by the customer is to be reduced by the amount shown.
You may well have encountered credit notes when shopping, such as when you return goods. When you have already paid for items, a credit note is offered to enable money to be taken off your next purchase.
In the business world, credit notes are raised before the bill is paid most of the time, so the amount is taken off the amount paid for the current purchase. The principle, however, is exactly the same.
On a practical level, the original invoices and credit notes are of course sent to the customer. You may be working from a copy, or in some cases simply from a computer listing transactions within the accounting system.
You should also note that the seller may send out monthly statements of the amount owing, or reminders for overdue invoices; these should not be confused with invoices, even though they may look similar.
A business that sells mainly for cash may still prepare invoices or receipts, which are very similar to invoices.
For most retail businesses, however, the source document that accountants will work from is the till roll. This shows the total amount taken in for goods and services, whether by cash, check, or card.
In very small businesses, such as those that buy everything for cash, the only record of purchases will be the till receipt for payment. For payments made using cash, there may also be a petty cash slip.
However, larger businesses need more formal systems to ensure that purchases are authorized by the right person and that payments for goods are only made when they have been received and checked.
Assume that Maiden Megastore is ordering 5,000 CDs from Acme Artistes. The following steps are taken:
First, Maiden prepares a purchase order. This is a form sent to Acme setting out the 5,000 CDs to be supplied and the price to be paid (already agreed between the companies).
The purchase order must be authorized at an appropriate level of management within Maiden.
Second, Acme sends the 5,000 CDs, and at the same time encloses a dispatch note giving the shipment details. This is checked against the order and approved by Maiden.
Third, Acme sends an invoice to Maiden for the agreed price of the 5,000 CDs.
Fourth, Maiden checks the invoice against the purchase order and possibly the dispatch note. The aim is to ensure that the goods were genuinely ordered and have been received.
A failure in the system at this point would mean that an unscrupulous trader could simply issue invoices for non-existent goods or services to businesses taken from a trade telephone directory and get paid.
If there are any problems with the shipment, debit and credit notes may be issued.
Fifth and finally (and possibly after Acme has had to issue a statement of the account, see above), Maiden sends Acme a check for the amount owed. This is often done using a payment slip that can be torn off the invoice.
It is not normal in business for Acme to then issue a receipt for the cash received if it was in response to an invoice. Acme will enter the payment against the amount owed by Maiden, leaving nothing outstanding, and will pay the check into the bank.
Note that the purchase order and dispatch note are not records from which accounting transactions should be entered. This is because they do not create or satisfy financial obligations.
They are useful when calculating accruals (i.e., operating expenses owed at the end of a period) for final accounts, but the main reason for including them here is to alert you to their existence, helping you to avoid confusing them with other documents.
The final category of source documents used to create accounting records consists of banking documents. Most of these will be familiar from your own personal banking.
Bank statements are crucial for the preparation of accounting records.
They may be the only record of certain transactions, such as payments made directly into the bank account of a supplier by a customer through the banking system (a BACS transfer). In other cases, they will summarize the information available elsewhere.
Payments made by check will generate two different records. The customer should have a completed check stub (often called a counterfoil) in the checkbook.
The supplier should have a completed paying-in slip stub/counterfoil in the paying-in book, showing the payment of the check into the bank. Sometimes, checks are not honored by the customer's bank (i.e., they are dishonored).
Dishonored checks are returned to the supplier who paid them in. They are marked refer to drawer.
Continuing with the previous example of Maiden Megastore, Acme, and the 5,000 CDs, let's note that when Maiden first received the check from Acme, it was entered in the accounting records with the result that Maiden is now shown as owing nothing.
If the check is returned without being honored, it is worthless. Also, another entry reversing the payment will have to be made in Acme's books. This ensures that Maiden is once again shown as still owing the money due for the 5,000 CDs.
A similar adjustment will have to be made in the books of Maiden to reflect the fact that they still owe Acme the price of the CDs.
A purchase order is an instruction from one company to another company to buy a certain quantity of goods at a specific price. A dispatch note is a document that accompanies the shipment of the goods, detailing what was sent and confirming that it matches the purchase order.
A debit note is a document that records the fact that an invoice has been paid, resulting in a decrease in the amount owed to the supplier. A Credit Note is a document that records the fact that an invoice has been received, resulting in an increase in the amount owed to the supplier.
A Bank Reconciliation Statement includes all transactions that have affected an account, dates of the transactions, the current balance, and any discrepancies. A source document is one record used to create accounting transaction records (e.G., Invoices). It consists of the date, amount, and other relevant information of a particular transaction.
Bank statements are important because they summarize all of the transactions that have taken place in a bank account during a specific period. This information is necessary for the preparation of accurate accounting records.
A credit card statement lists individual transactions, while a bank statement summarizes all of the transactions that have taken place during a specific period. Credit card statements are useful for verifying that an individual transaction is recorded correctly in the accounting records. In contrast, bank statements are important for summarizing all of the transactions that have taken place in a bank account during a specific period.
