Designing a Source-Document Check Procedure

Business Documents as a Source of Information

Skill: Create

Stimulus

Question

(a) Based on the table, identify TWO documents that have been wrongly used as source documents, and explain why such use is inappropriate.

(b) As Puan Hafizah's business adviser, propose and design a simple step-by-step procedure she can use to decide whether a document qualifies as a source document before recording it. Justify each step of your proposal.

Thinking steps

1. Recall the definition: a source document confirms that a transaction has taken place and forms the basis for entries in the books.
2. Test each document with "Has a real transaction taken place?" A catalogue and a quotation only offer prices; no buying or selling has happened, so they are non-source documents.
3. Trace the consequence: recording purchases from a catalogue/quotation creates fictitious purchases, while ignoring the invoice and credit note leaves the real purchase and purchases return out of the books.
4. Build criteria to distinguish them: (i) the transaction has occurred, (ii) valid details exist (date, quantity, price, parties), (iii) the document is original/verified, not merely an offer.
5. Arrange those criteria into a sequential procedure (screen → verify → classify → record → file) so a worker without an accounting background can follow it.
6. Justify each step by linking it to the risk it prevents, e.g. the verification step prevents recording transactions that do not exist.

Model answer

(a) The two misused documents are the supplier's catalogue and the quotation. Both are NON-source documents because they only inform the buyer of the goods, prices and terms SHOULD an order be made; at that stage no actual buying or selling has occurred. They therefore cannot form the basis of an entry. Recording them as purchases creates fictitious purchases, inflates the cost of purchases, and makes the profit/loss and the creditor balances inaccurate.

(b) Proposed procedure (check before recording):

Step 1 (Screen): ask "Has an actual transaction taken place (goods bought/sold, or money received/paid)?" If not (e.g. catalogue, quotation), set the document aside and do not record it. Justification: filtering offers from real transactions prevents fictitious entries.

Step 2 (Verify details): confirm the document shows a date, quantity, price, amount and the names of both parties, and that it is original/officially stamped. Justification: complete details ensure the transaction is genuine and auditable.

Step 3 (Classify): from the verified document, decide the type of transaction, e.g. purchase invoice (credit purchase), sales invoice (credit sale), receipt (cash), credit note received (purchases return), debit note, and so on. Justification: this links the source document to the correct book of prime entry.

Step 4 (Record): enter it in the matching book of prime entry based only on the source document. Justification: this ensures every entry is backed by evidence.

Step 5 (File by number): keep source documents in number/date order for reference and cross-checking. Justification: this makes error tracing and auditing easier.

With this procedure, the purchase invoice and credit note received that were previously ignored will now be recorded correctly, while the catalogue and quotation are set aside at Step 1.