📚 Accounting (9215) Study Notes: Sources and Recording of Data

Chapter: The Use and Preparation of Source Documents

Hello future accountants! This chapter is incredibly important because it's where accounting *begins*. Think of source documents as the basic building blocks of all financial records. Without them, we'd just be guessing!

In this section, we will learn what these documents are, why they are essential, and how they provide the concrete evidence needed to accurately record every business transaction. Don't worry if this seems tricky at first—we’ll break down each document step-by-step!

1. What Are Source Documents? (The Evidence)

1.1 Definition and Purpose

A Source Document is the original, written evidence that a transaction has taken place. It is the very first piece of paperwork generated when money or goods change hands (or are promised to change hands).

  • The Law of Accounting: Every single entry recorded in the accounting books must be supported by a source document.
  • Purpose: They prove the financial details (date, amount, nature of the transaction) are accurate and legitimate.

Analogy: If you buy a ticket for the cinema, the ticket is the source document proving you paid money to see a film. If you lose the ticket, you can't prove you paid!

1.2 The Source Document Flow

The process of data recording always follows this path:

  1. A Transaction occurs (e.g., buying new inventory).
  2. A Source Document is created (e.g., a Purchase Invoice).
  3. The data from the document is recorded in the Books of Prime Entry (which we cover in the next chapter!).

Quick Review: The source document is the critical link between the real-world transaction and the accounting record.

2. Key Types of Source Documents and Their Uses

The curriculum requires you to understand the most common documents businesses use daily. The key distinction to remember is whether we issue the document (a record of our sales) or whether we receive the document (a record of our purchases).

2.1 The Invoice (Selling and Buying on Credit)

The Invoice is perhaps the most frequent source document. It is used when goods or services are bought or sold on credit (meaning payment will be made later).

A. Sales Invoice (We Issue)
  • Purpose: Used when we sell goods/services to a customer on credit.
  • Data Provided: Proof of a sale; the amount the customer owes us.
  • Source for Recording: Used to record sales (money owed to us by debtors).
B. Purchase Invoice (We Receive)
  • Purpose: Received from a supplier when we buy goods/services on credit.
  • Data Provided: Proof of a purchase; the amount we owe the supplier.
  • Source for Recording: Used to record purchases (money we owe to creditors).

Memory Tip: If the document makes your customer pay you, it’s a Sales Invoice. If the document makes you pay someone else, it’s a Purchase Invoice.

2.2 The Credit Note (Fixing Mistakes)

A Credit Note is issued when a reduction needs to be made to an amount previously charged on an invoice. It is essentially the opposite of an invoice.

  • Why is it Issued?
    1. The customer returned damaged or incorrect goods.
    2. The customer was accidentally overcharged on the original invoice.
  • Effect: It reduces the customer’s debt (or our debt if we receive one).
  • Source for Recording: Used to record sales returns or purchase returns.

Did you know? A Debit Note is sometimes used by a business to formally request a Credit Note from a supplier, but the Credit Note is the document that actually changes the financial record.

2.3 The Receipt (Proof of Cash Payment)

A Receipt is the written acknowledgment that cash or a bank transfer payment has been received by the seller.

  • Purpose: Proof that money has been paid or received immediately (not on credit).
  • Source for Recording: If we issue a receipt, it records cash/bank income. If we receive a receipt, it records a cash/bank expense.

Example: When you pay for stationery using cash, you get a receipt immediately. This receipt is your source document.

2.4 Documents Related to Bank Transactions

Since most businesses use a bank account, documents related to depositing or withdrawing funds are essential source documents for the accounting records.

A. Cheque Counterfoil (or Stub)

When you write a Cheque, the part that remains attached to the chequebook (the counterfoil or stub) is vital.

  • Purpose: To record details (date, amount, payee) of money paid out of our bank account via cheque.
  • Source for Recording: Evidence of a bank payment expense.
B. Paying-in Slip (or Bank Deposit Slip)

This is the slip filled out when cash or cheques are deposited into the business's bank account.

  • Purpose: To record details of money paid into our bank account.
  • Source for Recording: Evidence of bank receipt/income.

Key Takeaway Summary: Invoices deal with credit (pay later). Receipts deal with cash/bank (pay now). Credit Notes correct invoices.

3. Analyzing and Preparing Source Documents

As an accountant, you must be able to quickly read a source document and identify the core information needed for recording.

3.1 Essential Information on Source Documents

Every reliable source document must include at least the following details:

  1. Date of the transaction.
  2. Name and address of the issuing party (seller) and the receiving party (buyer).
  3. A unique Document Number (e.g., Invoice No. 401).
  4. A clear Description of the goods or services.
  5. The Total Amount (and often the unit price, quantity, and VAT/tax if applicable).

3.2 Importance in Accounting

Why do we spend so much time preparing and saving these pieces of paper?

  • Verifiability: Documents provide objective proof. If a tax authority (or an auditor) asks to see proof of a transaction, the source document is the answer.
  • Accuracy: Source documents ensure the correct amount, date, and names are transferred into the accounting records.
  • Traceability: If there is a mistake in the ledger, the accountant can trace the error back to the original source document and correct it.

3.3 Common Errors to Avoid

Struggling students often mix up these two pairs of documents:

Mistake The Fix
Confusing an Invoice with a Receipt. An Invoice means payment is due later (credit). A Receipt means payment was made now (cash/bank).
Confusing a Sales Invoice with a Purchase Invoice. We issue a Sales Invoice (we get money). We receive a Purchase Invoice (we pay money).

Final Key Takeaway: Source documents are the foundation. They ensure honesty and accuracy in the business’s financial history, allowing us to accurately prepare our financial statements later.