Business Documents

Explanation

A business document is written evidence issued or received whenever a transaction takes place between two parties, usually a seller and a buyer. Every transaction such as buying inventory on credit, selling goods, returning damaged goods, or making a payment must be supported by at least one document. This document is the starting point of the entire accounting cycle because without written evidence there is no valid basis to record a transaction in the books of prime entry and then in the ledger. A document normally contains key information such as the names and addresses of both parties, the date, the document number, details of the goods or services, quantity, unit price, total amount and the terms of the transaction.

Business documents are important for several reasons. First, they serve as valid proof that a transaction took place, so they can be referred to if a dispute arises between seller and buyer. Second, they act as a source of information to record transactions accurately in terms of date, amount and the parties involved. Third, documents make internal control possible because every accounting entry can be checked back against its original document during an audit. Fourth, documents help the trader calculate profit or loss, prepare financial statements and meet tax requirements. In short, documents ensure the accuracy and reliability of accounting records.

In this chapter, business documents are divided into two groups: source documents and non-source documents. A source document is a document used directly as the basis for recording a transaction in the books of prime entry (journals and cash book). Examples of source documents include the invoice, debit note, credit note, receipt, cheque counterfoil, cash voucher, memo and bank statement. Each source document triggers a specific double entry. For example, an invoice received from a supplier is the basis for recording a credit purchase, while a credit note received is the basis for recording purchases returns.

A non-source document is a document that supports or precedes a transaction but is not used as the basis for making accounting entries. These documents are important for communicating and confirming details before the sale is completed, but they do not cause any entry in the journal. Examples of non-source documents are the letter of enquiry, quotation, catalogue, price list, order form (purchase order) and delivery note. Students must clearly distinguish between the two groups, because mistakenly treating a non-source document such as a purchase order as a source document would cause the transaction to be recorded at the wrong time.

The document flow chart between buyer and seller shows the sequence of documents moving through one complete credit transaction. The flow begins when the buyer sends a letter of enquiry, the seller replies with a quotation or price list, then the buyer sends a purchase order. The seller delivers the goods with a delivery note, followed by an invoice as a demand for payment. If goods are returned or the buyer was overcharged, the seller issues a credit note; if undercharged, the seller issues a debit note. The seller then sends a statement of account summarising the amount owed, and finally the buyer makes payment and receives a receipt. Understanding this flow helps students identify the correct document at each stage and record it accurately.

Worked examples

Practice

Exam tips

Key terms

Business document

Written evidence issued or received whenever a transaction takes place between two parties.

Source document

A document used as the basis for recording a transaction in the books of prime entry, e.g. invoice, credit note and receipt.

Non-source document

A document that supports or precedes a transaction but is not used to make accounting entries, e.g. quotation and purchase order.

Document flow chart

The sequence of documents moving between buyer and seller throughout one complete credit transaction.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 4

Other Content Standards in this chapter