Key Terms
Key Terms: Business Documents as a Source of Information
Learn these key terms for Chapter 3 so you can tell source documents from non-source documents, identify what each document does and calculate discounts correctly. Each term comes with a memory hook and how it is tested.
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Business Documents & Document Flow
- A business document is a written record made whenever a transaction occurs. Its importance: it serves as written evidence, a future reference, a way to avoid disputes, and the basis for making accounting entries.
- Document flow is the order in which documents pass between buyer and seller. Memory hook: think 'who sends what to whom, and when', then arrange the documents in the order the transaction happens.
- A cash transaction produces immediate-payment documents (e.g. cash bill and receipt), while a credit transaction produces a longer document flow because payment is made later. Common question: arrange documents in the correct order or identify the document for each type of transaction.
Source Documents vs Non-Source Documents
- A source document is the document that acts as the origin or basis for recording a transaction in the accounting books. Memory hook: 'source = the starting point of an entry'. Without a source document, no entry can be made.
- A non-source document is a document that is NOT used as the basis for making entries; it is only for checking or reminding. Two examples in the syllabus: Statement of Account and Bank Statement. This distinction is very frequently tested.
- A Statement of Account is a summary of transactions and the balance sent by the seller to a debtor as a reminder of the amount owed. It summarises documents already recorded, so it is not used as the basis for a new entry.
- A Bank Statement is a record of all bank-account transactions prepared by the bank for the customer. Its function is to check the balance and compare the business's records with the bank's records, not to make the first entry.
Source Documents for Cash Transactions
- A Cash Bill is issued by the seller to the buyer for a cash sale, showing the goods sold and the amount paid immediately. Memory hook: 'bill = buy now, pay now'.
- A Receipt is proof that money has been received. Its main function: to confirm receipt of payment (cash, cheque or otherwise). Memory hook: 'receipt = money is in'. It is issued by the party receiving the money.
- A Cash Register Slip is printed by the cash register at a retail shop each time a cash sale is made, showing the items and total. It is the source document for retail cash sales received.
- A Petty Cash Voucher is a document prepared to authorise and record a small expense paid from petty cash. Memory hook: 'small expense = petty voucher'. Common question: complete the voucher and match it to the transaction.
Banking & Payment Documents
- A Cheque Counterfoil is the part of the cheque left in the chequebook after a cheque is issued; it is the record of a payment made by cheque. Memory hook: 'the counterfoil stays with the payer'.
- A Payment Voucher is an internal document that supports and authorises a payment, usually with a bill or receipt attached as proof. Memory hook: 'voucher = authority to pay'.
- A Bank Slip / Cheque Deposit Slip is proof that cash or a cheque has been paid into the bank account. Memory hook: 'deposit slip = money into the bank'. It is the source document for money banked in.
- A Money Transfer Slip and an Electronic Banking Transaction Slip are proof of money transferred between accounts, whether at the bank counter or through online banking. Function: to confirm a payment or receipt without physical cash.
Debit Advice, Credit Advice & Memo
- A Debit Advice is a document from the bank informing the customer that the account has been debited (reduced), for example for bank charges. Memory hook: 'debit = bank balance goes down'.
- A Credit Advice is a document from the bank informing the customer that the account has been credited (increased), for example interest or a direct credit received. Memory hook: 'credit = bank balance goes up'.
- A Memo is an internal source document prepared by the business itself for a transaction that has no external source document, for example the owner taking goods for personal use. Memory hook: 'no outside document? use a memo'.
Trade Discount & Cash Discount
- A trade discount is a reduction off the list price given by the seller, usually for bulk buying. It is NOT recorded in the accounts because it only sets the net selling price. Memory hook: 'trade discount = lower price, not recorded'.
- A cash discount is a reduction given as a reward for paying within a set period. It IS recorded in the accounts (discount allowed / discount received). Memory hook: 'pay early = save, and it is recorded'.
- The correct order of calculation: subtract the trade discount from the list price first to get the net selling price, then subtract the cash discount from that amount. This is the most common slip in calculation questions.
- Common question: complete the important information in a source document including both discounts, explain the function of each discount, and compute the net payment as in the table below.
| Item | RM |
|---|---|
| List price | 2,000 |
| (-) Trade discount 10% | 200 |
| Net selling price (on invoice) | 1,800 |
| (-) Cash discount 5% | 90 |
| Net payment received | 1,710 |
The trade discount merely reduces the price and is not recorded; the cash discount (RM90) is recorded as a discount in the accounts.
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