Source Documents

Question 1

Source Documents

Answer 1

the pieces of paper that provide both the evidence that a transaction has occurred, and the details of the transaction itself

Question 2

2 roles of source documents

Answer 2

They provide the veri able evidence of the details of a transaction, thus ensuring that the information in the accounting reports will be reliable; that is, free from bias or subjectivity.

They provide the evidence that is required by the Australian Tax Of ce (ATO) relating to the rm’s income tax and Goods and Services Tax (GST) obligations.

Question 3

GST Goods and Services Tax

Answer 3

applies to most goods (except fresh food) and services. Under this system, the federal government taxes consumers 10% of the price of whatever they have purchased, with the business that sells the goods/service acting as a tax collector for the ATO. At the same time, any GST the business pays to its suppliers will reduce the amount it owes to the ATO.

Question 4

Two different types of GST

Answer 4

the GST it has collected on its sales or services (which it owes to the ATO) (GST PAYABLE)

the GST it has paid to its suppliers (which reduces the GST owed to the ATO) (GST RECEIVABLE)

Question 5

As a consequence of the GST, source documents must include the following information: 7 Points, what happens if these points are not shown

Answer 5

• the words ‘tax invoice’ stated clearly
• the name of the seller
• the Australian Business Number (ABN) of the seller
• the date of the transaction
• a description of the item/goods provided
• the price of the transaction including the GST
• the amount of the GST. (Fees of more than $1 000 must also show the name, and
address or ABN of the buyer.)
Without these details, the source documents cannot be used to substantiate GST
transactions, and the business may end up paying to the ATO more GST than is required.

Question 6

Cash receipt

Answer 6

The term cash receipt can refer to both the transaction that occurs when cash is received from another entity, as well as the source document that veri es that transaction. All cash received must be evidenced either by:
• a cash receipt (hand-written or generated electronically)
• a cash register receipt.

Question 7

When should cash receipts be issued

Answer 7

Cash receipts should be issued each and every time cash is received, whether it is for a cash sale or cash fees, a capital contribution, a receipt of a loan or some other source. The only exceptions are when cash is deposited directly into the rm’s bank account, in
which case the source document will be the Bank statement.

Question 8

What must cash receipts specify to be a source document

Answer 8

As a source document, a receipt must specify the date of the transaction, the amount received, and the reason for the receipt of the cash. In addition, it should be numbered for easy and accurate identi cation. Regardless of the type of receipt issued, it must contain all the information necessary to account for the GST.

Question 9

Who receives the original

Answer 9

In most cases, the customer will be given the original, while the business will retain a copy for its own records.

Question 10

Cash sales and GST

Answer 10

At the time a cash sale is made, the business will receive the cash for the service, plus the GST, and this must be documented on the receipt. While the business is entitled to keep the cash for the service, the GST is collected on behalf of the Australian Government, so the business owes the GST to the government. For this reason, any GST a small business collects or receives on it sales creates a GST liability to the Australian
Tax Office (ATO).

Question 11

Cash receipt equivalent for payments

Answer 11

Just like cash receipts, all cash payments for goods and services should be evidenced
by a source document, and for most cash payments this should be a cheque butt.

Question 12

Who keeps what of a cheque butt

Answer 12

When a business pays by cheque, the cheque itself is given as payment and the cheque butt is retained by the business.

Question 13

3 advantages of cheque butts (levels of protection)

Answer 13

Firstly, cheques mean the owner can avoid carrying around large amounts of cash. Second, cheques can be traced to identify the business or individual who deposited the funds into their account. And lastly, the cheque butt that is retained after every payment provides evidence of the amount and use of the cash.

Question 14

Drawee, drawer, payee, not negotiable

Answer 14

The cheque itself is a document informing the bank (Normalmeans Bank), the drawee, to transfer funds from the account of the drawer (Jerry’s Temp Agency) to the bank and account of the payee (P. J. Hacker Real Estate.) The drawer actually hands the cheque to the payee, who then presents it at their own bank.
Cheques should not be made out for cash when paying for business costs because if the cheque is lost then it can be cashed or deposited into any account. It is a sensible business practice to nominate the payee and cross it Not negotiable. A cheque that is marked ‘Not negotiable’ can only be deposited into the account of the nominated payee.

Question 15

Why should chequer not be made out for cash when paying for business costs

Answer 15

if the cheque is lost then it can be cashed or deposited into any account.

Question 16

Explain why the cheque is signed by the owner even though the owner is separate from the business

Answer 16

Note that although the cheque is signed by the owner, the entity principle assumes that the bank account belongs to the business. The business is therefore known as the drawer, as it is the business that is drawing on its account to pay for a purchase.

Question 17

Cheque number

Answer 17

This is the number by which the cheque can be identified, allowing it to be traced. If anything should happen to the cheque (i.e. if it were reported lost/stolen) the drawer could inform their bank and have that particular cheque cancelled.

Question 18

Account number

Answer 18

This is the number of the drawer’s bank account. The first six digits identify the bank, state and branch at which the account is held (this is known as a BSB number). The last eight identify the actual account of the drawer.

Question 19

Accounting process

Answer 19

Source documents - records - reports - advice

Question 20

Cheque butt

Answer 20

a source document used to verify cash payments. The cheque butt provides all the relevant information, but to satisfy the ATO the business would also need to keep the tax invoice that was issued by the supplier.

Question 21

Cash payments and GST

Answer 21

At the time a cash payment is made, the business will pay cash for whatever it is purchasing, plus the GST on the purchase, and this should be documented on the cheque butt. In this example, Jerry’s Temp Agency has paid $1 800 for the rent, plus $180 GST. This means its bank account will decrease by $1 980 in total.
However, if a business has paid any GST to its suppliers, it is allowed to deduct this from the GST it owes. That is, because the GST will be forwarded to the ATO by the rm’s suppliers, it is treated as if the business had actually paid the GST straight to the government. Thus, GST paid to suppliers will actually decrease the rm’s GST liability. (If a rm pays more GST than it receives, it will actually end up with a GST asset – it will be due to receive a GST refund from the ATO.)

Question 22

Invoice

Answer 22

When goods or services are sold or
purchased on credit, the source document will be an invoice, which will provide the evidence of the transaction and the details necessary to record it (even though no cash has changed hands). Because GST is recognised and reported at the time of purchase or sale, the invoice must also show all the information necessary for it to be classi ed as a tax invoice.

Question 23

How are names organised on invoices

Answer 23

The seller or supplier (Jerry’s Temp Agency) is also the business that issues the invoice and so will have its name at the top of the invoice. Conversely, the purchaser or customer (A. N. Accountant) is named in the middle of the invoice.

Question 24

Who receives the original of an invoice

Answer 24

The original is sent to the customer with the copy being retained by the seller for its recording purposes. Note that even though this transaction is being carried out on a credit basis it still must display all the features required by the ATO of a tax invoice.

Question 25

Memo

Answer 25

a source document used to verify internal transactions. Some transactions will not be evidenced by any of the above documents, as they involve neither a sale nor purchase, nor the receipt or payment of cash (like non-cash transactions with the owner and certain stock transactions).These transactions must still be veri ed by a document, but it will be a document issued from within the rm, called a memorandum or memo. Memos can be issued for any number of transactions that cannot be evidenced by standard source documents and so their format is much more exible than the other documents discussed so far. Put simply, they will describe a particular transaction, and request that it is recorded.

Question 26

Service business

Answer 26

a small business that operates by providing its time, labour or expertise (or a combination of all three) in return for a fee or charge

Question 27

Cash receipts

Answer 27

the amount of cash the business has received from other entities
during a period, and its sources (i.e. where it has come from)

Question 28

Cash payments

Answer 28

the amount of cash the business has paid to other entities during
a period, and its uses (i.e. what it was spent on)

Question 29

Bank balance

Answer 29

the level of cash on hand at a particular point in time.
Cash receipts will increase a rm’s bank balance, while cash payments will decrease that balance.

Question 30

Journals

Answer 30

an accounting record which classi es and summarises transactions
during a particular reporting period. By recording the cash transactions in a Cash Receipts Journal and a Cash Payments Journal, the raw data contained on the source documents is classi ed and summarised so that it becomes information, which can be presented in accounting reports.

Question 31

Cash receipts journal

Answer 31

summarises all cash received by the business (from other entities) during a particular reporting period

Question 32

Cash payments journal

Answer 32

summarises all cash paid by the business (to other entities) during a particular reporting period.

Question 33

Single entry accounting

Answer 33

the process of recording transactions in journals and then using the summarised information to prepare reports

Question 34

Date/details/red no

Answer 34

As with most accounting records, transactions are recorded in the Cash Receipts Journal in date order, with a brief description of the transaction noted in the details column. In order to satisfy the demands of reliability, the source document – which in this case is a receipt number – is recorded with the transaction. Because these receipts are issued by the rm itself (in this case, Goghs’ Painting Service) the receipt numbers should run in sequence. (A missing document should be investigated immediately to identify any possible fraud.)

Question 35

Bank

Answer 35

The amount of cash received is entered in the Bank column to allow calculation of the total cash received for the reporting period.

Question 36

Classification columns

Answer 36

In a multi-column Cash Receipts Journal, each cash receipt must be recorded twice: once in the Bank column to record the cash received, and a second time in a classi cation column to record the source of that cash. These classi cation columns allow for frequent cash receipts to be summarised, so that only the total needs to be reported in the Statement of Receipts and Payments.

Question 37

Sundries

Answer 37

Any receipts that are infrequent should be recorded in the sundries column, because it is not necessary (or possible!) to summarise transactions that occur only once.

Question 38

Double checking mechanism

Answer 38

At the end of the period, each column in the Cash Receipts Journal should be totalled. As a double-checking mechanism, the total of the Bank column should equal the sum of the totals of the other (classi cation and sundries) columns. If these amounts do not match, then an amount has not been recorded accurately in the Cash Receipts Journal, and the totals cannot be used in the preparation of reports until the error is corrected.

Question 39

Why should all Cha numbers be accounted for

Answer 39

All cheque numbers should be recorded, even if the cheque is cancelled, so that all cheques are accounted for.

Question 40

GST payable

Answer 40

GST owed by the business to the ATO when the amount of GST the business has received on its fees is greater than the GST it has paid to its suppliers

Question 41

GST Settlement

Answer 41

a payment made to the ATO by a small business to settle GST payable

Question 42

GST receivable

Answer 42

GST owed to the business by the ATO when the amount of GST the business has paid to its suppliers is greater than the GST it has received on its fees

Question 43

GST REFUND

Answer 43

a cash receipt from the ATO to clear GST receivable

Question 44

Why will GST received usually be greater than GST paid?

Answer 44

Because selling prices are usually higher than cost prices

Question 45

Why is GST paid to suppliers recorded in the sundries column

Answer 45

Whereas GST paid to suppliers is recorded in the GST column, a GST settlement is paid to the ATO to settle a current liability from a prior period, so it must be recorded in the sundries column.

Question 46

When might a business have a GST receivable

Answer 46

If the business makes bulk purchases of goods or purchases non-current assets, then it is possible that its GST paid to suppliers could be greater than its GST received.

Question 47

Statement of receipts and payments

Answer 47

an accounting report which lists cash receipts and payments during a reporting period, the change in the bank balance, and the opening and closing bank balance

Question 48

Cash surplus and deficit

Answer 48

Cash surplus
an excess of cash receipts over cash payments, leading to an increase in a positive bank balance or decrease in a bank overdraft
Cash de cit
an excess of cash payments over cash receipts, leading to a decrease in a positive bank balance or an increase in
a bank overdraft

Question 49

Single entry accounting

Answer 49

the process of recording transactions in journals and then using the summarised information to prepare reports

Question 50

Deficits and overdrafts

Answer 50

It is worth noting at this point the difference between a cash de cit and a bank overdraft. A de cit refers to a decrease in a rm’s bank balance, the change, but it does not necessarily mean a negative balance. (It is quite possible for a rm to have payments greater than its receipts and suffer a cash de cit, yet retain a positive bank balance due to a healthy opening balance.) An overdraft refers to a negative balance; it describes not a change but a level of cash.

Question 51

Uses of the statement of receipts and payments

Answer 51

The Statement of Receipts and Payments is more useful for decision-making than the cash journals because it summarises all the information relating to the rm’s cash position. It can then be used to help the owner make decisions about the rm’s receipts, payments and its level of cash on hand.
A high bank balance might indicate the ability to make higher loan repayments, take greater drawings, purchase newer non-current assets, or undertake other expansionary activities. A low bank balance might indicate the need for lower loan repayments, lower drawings, the use of credit for some purchases, or perhaps even a capital contribution by the owner. A business which has not yet organised an overdraft facility may wish to do so to ensure that it has suf cient funds available to meet its payments.