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What are source documents?

Source documents are evidence that a financial transaction has taken place.

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Why do we need source documents?

1.Provide evidence a transaction took place 2.Clarifies misunderstandings and resolves disputes 3.Helps to ensure the right goods are at the right place at the right time

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Sales Invoice

Issued following a CREDIT SALE a sent by the business to confirm goods sold, how much is owed and when payment is to be expected.

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Purchases Invoice

Received following a CREDIT PURCHASE a sent by the supplier to confirm goods purchased, how much is owed and when payment is to be expected.

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Till Roll

Summary of all cash sales. Details date and amount of money received.

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Paying slip counterfoil

The stub left in paying in books. Provides details of any cheques paid in, including the amount, date and who to cheque was from. It is stamped by the bank for confirmation.

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Cash Receipt

Received from the supplier when we have purchased goods using cash or any other immediate method. Details amount, date, and goods purchased.

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Credit Note

Sent when customers return goods which were originally brought on credit. Details a reduced amount is owed or that nothing is owed at all.

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Chequebook Counterfoil

The stub left in chequebook. Provides details of any cheques written, including the amount, date and who to cheque was paid to.

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Bank statement

Provide evidence of any bank transactions, eg, money being paid into your account. Confirmation of electronic transactions.

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Direct Debit

Variable amounts of money automatically is taken from your bank account electronically on a regular basis.

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Standing Order

Fixed amounts of money automatically is taken from your bank account electronically on a regular basis.

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Accrual

An expense which is due but left unpaid at the end of the accounting period. It increases Expenses in the income statement and increases Current Liabilities in the balance sheet.

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Prepayment

An expense which has been paid in advance and relates to the next accounting period. It reduces Expenses in the income statement and increases Current assets in the balance sheet.

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Assets

are something you own

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Current assets

Cash or can easily be turned into cash. Owned for less than 1 year.

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Non-current assets

Not brought for resale, help to generate profit. Owned for more than 1 year.

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Depreciation

measure of consumption of a Non-current asset, due to (WOOD) wear and tear, out of date, obsolescence, and deterioration. This is a non cash expense.

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Cash discount

Discount given to customers who pay promptly. Usually smaller than a trade discount, can be cancelled if terms are not met. Entered into the cashbook once payment is made.

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Discount allowed

discount given to customers who settle their bills promptly. Increase in Expenses.

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Discount received

discount received from suppliers for settling our bills promptly. Increase in Revenue

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Trade discount

Discount given to customers who Bulk buy and are of the same trade. Given to encourage repeat custom. Deducted from sales invoice before it’s entered into day books.

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Drawings

things taken from the business for the owners personal use. Usually money but can be Goods, vehicles or property. Subtracted from capital at year end.

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Liability

something that you owe.

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Current liability

is a debt that must be repaid within one year.

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Non-current liability

is a debt that will take more than one year to repay.

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Source document

Evidence that a financial transaction has taken place.

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Stakeholders

Individuals or organisations that have an interest in the business.

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Trade payables (creditors)

This is when the business owner owes money to the supplier for goods purchased and it’s a current liability.

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Trade receivables (debtors)

This is when the debtor owes money to business following a credit sale it is a current asset.

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Capital

Investment made by the owner at the start of the business. Usually money but can be vehicles, property ect.

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Expenses

Ongoing, day to day running costs for goods and services. They decrease profits.

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Revenue

Earned from the sale of goods. Will increase profits.

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Dishonoured Cheques

When the drawers bank refuses to pay. This may be because there is an error on the cheque, the drawer asked for the cheque to be stopped or they don’t have enough money in the bank to cover the cost of the cheque.

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Uncleared lodgements

When cheques have been received by the business but either not paid into the bank yet or not cleared in the bank.

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Unpresented Cheques

When cheques have been issued by a business but not paid into the bank by the recipient or have not cleared yet.

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Trade receivables list

A list of all the balances brought down from the debtors accounts in the sales ledger.

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Trade Payables List

A list of all the balances brought down from the creditor accounts in the purchases ledger.

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Cost of Sales

The cost of those goods sold in the current accounting period. We must adjust the purchases figure for opening and closing inventory. Cost of sales is subtracted from revenue to give gross profit on the income statement.

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Cost of sales formula

Opening inventory +purchases +carriage inwards -Returns Outward -Goods taken for own use -Closing inventory =Cost of sales

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Income Statement layout

Sales Revenue - Less cost of sales + Add additional revenue - Less Expenses = Profit for the year

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Bank Reconciliation statement

A bank reconciliation statement identifies and resolves the differences between a business's cash book and the bank statement issued by the bank.

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Omission

A transaction completely omitted from the bookkeeping.

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Comission

A correct amount posted in the correct TYPE of account but the wrong account was used. eg Rent of £300 entered as Wages £300.

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Principle

A transaction recorded in the wrong type of account.

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Compensating errors

Mistake of equal value on both sides.

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Reversal of entries

Correct amounts entered on the wrong side.

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Error of original entry.

If the incorrect number entered on the source document.

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Mispost

Two Debit or Two Credit entries

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Miscast

Error on addition

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Single entry

Entered on only a debit or a credit.

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Transposition

Right numbers in the wrong order eg, 1345 recorded as 1354

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Where must all errors be recorded?

The journal

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Statement of corrected net profit

The statement will show the draf profit, and any additions or deductions from the net profit arising from error correction

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How can errors be minimised

Using computers. Division of labour. Send out bill regularly. Regularly check statements.

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Bad Debts

Bad debts are and Expense on the Income Statement. They decrease Profits. Bad debts are subtracted form Debtors in the current assets section of the balance sheet and thefore they decrease working capital.

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What is recorded in the journal

Credit sales and purchases of NCA. Error correction. Writing off bad debts. Return of NCA brought on credit.

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Get Revising

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