2. Source Documents for Recording Financial Transactions Flashcards
What are sources documents?
Whenever a business transaction takes place involving sales or purchases, receiving or paying money, or owing or being owed money, it is necessary for the transaction to be evidenced by a source document.
The documents must be hard copy or electronic. Source documents are the documents which are produced by, or input into, a business’ accounting system as the starting point to recording the transactions of a business for accounting purposes.
In respect of a credit sale, what does the business need to record? (4)
- The amount of the sale itself
- The amount owed by the customer (receivable)
- any VAT/discounts
- Payments subsequently received
How is AI being used in computerised accounting systems?
How does this affect the work of accountants?
In some sophisticated accounting software packages, the system will use Artificial Intelligence (AI) to correctly raise invoice to customers, and input and process invoices received.
Whilst the use of AI has reduced the need for intervention from bookkeepers, it is important for professional accountants to understand what information the system is recording and be able to confirm the accuracy of that information.
What are the stages a sales system goes through when a business sells a good on credit to a customer? (4)
- Customer Order
- Dispatch Goods
- Raise Invoice
- Receive Payment
Explain the customer order stage of a sales system.
What is a sales order? Is it a source document?
When a customer places an order, a sales order is created detailing the goods or services required and the agreed price.
While sales orders are important from a practical point of view, they are not treated as source documents for recording financial transactions in the business accounts.
Explain the dispatch goods stage of a sales system.
What is a delivery note? Is it a source document?
When the goods or services are delivered to the customer, they are usually accompanied by a delivery note prepared by the seller. This sets out the goods/services delivered, the quantities delivered, the date of delivery and the delivery address. A delivery note is not a source document.
The delivery note is most often prepared with reference to the sales order. Once the delivery is complete, the delivery note is is used to provide information for creating the sales invoice. The delivery note is not a source document for credit transactions.
Explain the raise invoice stage of the sales system.
The seller will prepare and send an invoice to the customer to request payment for the goods or services delivered.
Invoices are source documents and need to be recorded in the accounting system.
Explain the receive payment stage of the sales system.
The customer settles the invoice, either by banks transfer or by cheque or cash.
What are the stages of the purchases system when a business purchases goods on credit from its suppliers?
- Purchase Order
- Receive Goods
- Receive Invoice
- Make Payment
Explain the purchases system.
Is a purchase order a source document?
What is the GRN? Is it a source document?
A business will identify the goods it requires from its supplier and raise a purchase order which is sent to the supplier.
The supplier will generate a sales order based on the purchase order received.
A purchase order is not a source document.
Once the goods are received, a good receives note (GRN) is raised by the business to record the receipt of goods.
The accounts department will often ask to see the GRN to confirm the goods were delivered before paying a purchase invoice.
Sometime late, the business will receive an invoice from the supplier to request payment for the goods delivered. Invoices are source documents and need to be recorded in the accounting system.
The business will then settle the invoice by transfer to the supplier’s bank account or by cheque or by cash.
What are invoices?
Invoices are source documents for credit transactions. They are used to record transactions which have been made on credit.
What does on credit mean?
‘On credit’ means goods or services are supplied but payment is not made straight away as there is a ‘period of credit’ before payment is due.
What is a sales invoice?
When a business sells goods or services on credit to a customer, it sends out a sales invoice.
The invoice details should match the details on the delivery note. The invoice is a request for the customer to pay what is owed.
Sales invoices can be manually prepared and entered into the accounting system by the bookkeeper or automatically generated by the accounting system.
Invoices raised are sequentially numbered, so that the business can keep track of all the sales invoices it sends out.
What is a purchase invoice?
When a business buys goods or services on credit it receives a purchase invoice from the supplier. The details on the invoice should match the details on the purchase order (to confirm goods were actually ordered and at what price) and the goods received note (to confirm the quantity of goods received). A purchase invoice received by the customer is the same document as the sales invoice raised by the supplier.
What information is usually shown on an invoice?
- Invoice number
- Name and address of seller and purchaser
- Sale date
- Product/service description
- Quantity and unit price of what has been sold
- Details of trade of bulk discount, if any and any early settlement (cash) discount offered for payment by an agreed date
- Total invoice amount including VAT details, if appropriate
- The date by which payment is due, account details for the transfer of funds and other terms of sale
- A remittance advice slip may also be included if settlement by cheque is permitted. The customer will include the remittance advice slip with their payment so that the seller can identify what outstanding amounts are being settled by the payment
