Welcome to Business Documentation: The Evidence Trail!
Hello future accountants! Don't worry if bookkeeping sometimes feels like a mystery. This chapter, "Business Documentation," is actually the easiest way to start because it deals with things you see every day: receipts, invoices, and notes!
Think of business documentation as the proof. Every time a business buys or sells something, receives money, or pays a bill, they create a document. These documents are the starting point—the evidence—for all the numbers we put into our books.
In this chapter, you will learn to identify the most common source documents, understand their purpose, and know how they become the first step in the accounting process. Ready to become a financial detective? Let's go!
1. What Are Source Documents? (The Foundation)
Definition and Purpose
A Source Document is the original written evidence that supports a transaction. If a transaction happens (money moves, goods are exchanged), there must be a source document to prove it occurred, how much it was for, and who was involved.
Analogy: The Chef's Recipe Book
Imagine you are a chef making a complicated meal. You don't just guess the ingredients; you follow a recipe. In accounting, the source document is the recipe. The accountant cannot record anything in the ledger (the final dish) unless they have the source document (the recipe) telling them exactly what happened.
Did you know? Source documents are legally required. If a tax inspector (or an auditor) wants to check a business’s records, the first thing they ask for is the original source document to verify the entry!
Key Components of Any Source Document
While every document is different, they all must contain essential information:
- Date: When the transaction occurred.
- Parties Involved: The name and address of the seller and the buyer.
- Description: What exactly was sold or purchased (goods or services).
- Amount: The price, often split into the cost (Net amount) and the sales tax (like VAT or GST).
- Unique Reference Number: A specific number (e.g., Invoice No. 456) for tracking.
2. Essential Source Documents Explained
We categorize documents based on whether the transaction was on credit (pay later) or cash (pay now). Understanding this difference is vital!
A. Documents Used for Credit Transactions
When goods are bought or sold "on credit," the money is not exchanged immediately. The buyer owes the seller money.
1. Invoice (The Bill)
The Invoice is the most important source document for credit sales and purchases. It is a formal request for payment.
- Sales Invoice: This is the invoice we send out to a customer when we sell goods on credit. For us, it is evidence of income earned (revenue).
- Purchase Invoice: This is the invoice we receive from a supplier when we buy goods on credit. For us, it is evidence of a cost incurred (expense).
Key Terms Reminder:
- A customer who owes us money is called a Trade Receivable (or Debtor).
- A supplier we owe money to is called a Trade Payable (or Creditor).
2. Credit Note (The Reversal)
Imagine you sold a customer 10 laptops (Invoice sent), but two of them were damaged and returned. You need to adjust the original bill!
A Credit Note is a document issued by the seller to the buyer to cancel or partially reverse the amount of the original invoice.
- Purpose: Used when goods are returned, or if the original invoice amount was calculated incorrectly (overcharged).
- Impact: A credit note reduces the amount the customer owes us (or the amount we owe the supplier).
Memory Trick: The word 'Credit' sounds like 'Cancel' or 'Correction'. A Credit Note cancels part of the debt.
3. Debit Note (The Request for Correction)
The Debit Note is less common in day-to-day transactions than the Credit Note, but it’s sometimes used.
- Purpose: A debit note is usually sent by the buyer to the seller, asking them to issue a Credit Note (i.e., requesting an adjustment because of damaged goods). It acts as a formal request to correct an invoice.
B. Documents Used for Cash Transactions
These documents prove that money was immediately exchanged (cash or bank transfer).
1. Receipt
A Receipt is a document acknowledging that money has been received from a customer or paid to a supplier.
- If we receive cash: We issue a receipt to the customer. This proves we collected the funds.
- If we pay cash: We receive a receipt from the supplier. This proves we paid the funds.
Common Mistake to Avoid: Students often confuse Invoices and Receipts. Invoices are for future payment (credit). Receipts are for immediate payment (cash). You receive an Invoice first, and later, when you pay it, you get a Receipt.
2. Cheque Counterfoil / Cheque Stubs
A Cheque Counterfoil (or stub) is the small section retained by the person writing the cheque.
- Purpose: It records the date, the amount, and the payee (who the money went to). It acts as the business's internal proof that a bank payment was made.
3. Paying-in Slip / Bank Deposit Slip
A Paying-in Slip is filled out when a business deposits cash or cheques into its bank account.
- Purpose: The bank stamps or signs one copy, which the business keeps as proof that they deposited the specified amount of money on that date.
Quick Review: Document Type Summary
| Document | Purpose (What does it prove?) | Transaction Type |
|---|---|---|
| Invoice (Sales or Purchase) | A demand for payment for goods/services supplied. | Credit (Pay later) |
| Credit Note | Cancellation or reduction of an existing invoice amount. | Credit (Adjustment) |
| Receipt | Proof that cash/money has been immediately received or paid. | Cash/Bank (Immediate) |
| Cheque Counterfoil | Proof of payment made from the bank account. | Bank |
3. Why Documentation is the Backbone of Accounting
You might think, "Why all the paperwork?" Source documents serve critical functions that make bookkeeping possible and reliable.
A. Authorization and Evidence
Documentation provides irrefutable evidence. If someone claims they paid a bill, the receipt proves it. If someone claims a sale was made, the invoice proves it. Without this evidence, all accounting entries would just be based on memory or guesswork!
B. Input for Books of Prime Entry
This is where the documentation chapter links directly to the rest of bookkeeping!
Source documents are the starting point. They provide the necessary data (date, amount, parties) to record the transaction in the Books of Prime Entry (also called Day Books or Journals).
Step-by-Step: Document to Record
- Transaction Occurs: Example: We sell £500 worth of goods on credit.
- Source Document Created: We issue a Sales Invoice (Source Document).
- Entry in Book of Prime Entry: The accountant uses the Sales Invoice to record the transaction in the Sales Day Book (Book of Prime Entry).
- Final Recording: The totals from the Sales Day Book are eventually transferred to the Ledger Accounts.
Quick Link:
- Sales Invoices \(\rightarrow\) Sales Day Book
- Purchase Invoices \(\rightarrow\) Purchases Day Book
- Receipts for cash received \(\rightarrow\) Cash Book (Receipts Side)
- Cheque Counterfoils \(\rightarrow\) Cash Book (Payments Side)
C. Audit Trail and Internal Control
Source documents create an Audit Trail. This means that every single entry in the final financial statements can be traced backwards, step-by-step, to the original piece of paper that authorized it. This helps auditors (external checkers) and management ensure that money is not being stolen or misused.
D. Calculation Basis
Documents calculate amounts, including trade discounts and sales tax (like VAT).
A Trade Discount is a reduction given to bulk buyers or trade customers. This discount is usually calculated and deducted directly on the invoice before the invoice total is calculated. Only the final, discounted figure is recorded in the books.
Important Note on VAT/Sales Tax: In many IGCSE questions, you must identify the VAT amount and the Net amount (the cost without VAT). The source document clearly separates these figures, ensuring the business records the correct figures for tax purposes.
4. Accessibility Features & Common Errors
Encouragement Corner
Don't worry if matching every document to every day book seems overwhelming right now. For the exam, the most critical skill is identifying the source document and understanding whether it is proof of money coming in or going out, and whether the transaction was cash or credit.
Memory Aid: The IN/OUT Flow
Think about the document's effect on your own business's money or debt:
- Sales Invoice: Money IN (eventually) - Increases debt owed to us.
- Purchase Invoice: Money OUT (eventually) - Increases debt owed by us.
- Receipt (Issued by us): Money IN (now) - Proves cash received.
- Cheque Counterfoil: Money OUT (now) - Proves cash paid.
Common Mistake: Ignoring the Date
The date on the source document is the date the transaction must be recorded, not the date the document was processed by the accountant! Always use the date on the source document when entering data into the books.
Key Takeaway for this Chapter
Source documents are the mandatory starting line for all bookkeeping. They verify the existence and details of every single financial transaction. No document, no record!
You've finished the foundational chapter on documentation! You now have the necessary evidence to begin recording transactions in the next section. Well done!