Revision Notes
Revision Notes: Business Documents as a Source of Information
Concise Form 4 Chapter 3 notes covering the meaning and importance of business documents, the difference between source and non-source documents, cash and credit document flow, the functions of source documents, and the calculation of trade and cash discounts.
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Meaning and Importance of Business Documents
- A business document is written evidence issued or received when a transaction takes place between a buyer and a seller.
- Serves as valid proof that a transaction took place and can be referred to when a dispute arises.
- Acts as the source of information for recording transactions into the books of prime entry (journals) and the ledger.
- Helps confirm the amount, date, type of goods and terms of the transaction such as discounts.
- Enables internal control and auditing because every entry is supported by a document.
Source Documents vs Non-Source Documents
- A source document is a document that forms the basis for making accounting entries (recording transactions).
- Examples of source documents: cash bill, receipt, cheque counterfoil, payment voucher, petty cash voucher, memo and bank slip.
- A non-source document is NOT used to record transactions but only for checking and reference.
- Examples of non-source documents: Statement of Account and Bank Statement.
- How to tell them apart: ask whether the document is the basis for an entry (source) or merely a summary/check (non-source).
Document Flow: Cash and Credit Transactions
- Cash transaction: payment is made immediately, so the seller issues a Cash Bill and then a Receipt as proof of money received.
- Credit transaction: payment is made later, so the seller first issues an Invoice (and a Debit Note/Credit Note if adjustment is needed).
- Simple credit flow: Quotation → Purchase Order → Invoice → Debit/Credit Note → Statement of Account → Receipt after payment.
- A Debit Note is issued to INCREASE a charge (e.g. undercharged); a Credit Note to REDUCE a charge (e.g. goods returned).
- Arrange documents in the correct sequence. The cash document flow is simpler because there is no credit period.
Functions of the Twelve Source Documents
- Cash Bill: proof of a cash sale/purchase; Receipt: proof that money has been received.
- Cheque Counterfoil: record of details of a cheque issued; Payment Voucher: support/approval for a payment made.
- Petty Cash Voucher: record of small expenses; Cash Register Slip: proof of daily retail cash sales.
- Bank Slip / Cheque Deposit Slip: proof that money or a cheque was deposited into the bank account.
- Money Transfer Slip & Electronic Banking Transaction Slip: proof of an electronic transfer or payment.
- Debit Advice & Credit Advice: notify that a customer's account has been debited or credited; Memo: internal instruction/record of the business.
Trade Discount and Cash Discount
- Trade discount: a reduction on the list price to encourage bulk buying; NOT recorded in the accounts, only deducted in the invoice.
- Formula: Trade discount = List price x Trade discount rate; Invoice value = List price - Trade discount.
- Cash discount: a reduction to encourage prompt payment within the credit period; IS recorded in the accounts.
- Formula: Cash discount = Amount after trade discount x Cash discount rate; Amount paid = Invoice value - Cash discount.
- Discount allowed (to customers) is an expense; discount received (from suppliers) is a revenue.
Non-Source Documents: Statement of Account and Bank Statement
- Statement of Account: a summary of transactions between a seller and a customer for a period and the balance to be settled.
- Function of Statement of Account: reminds the customer of the amount owed and helps check the account balance.
- Bank Statement: a record issued by the bank of all transactions into and out of the owner's bank account.
- Function of Bank Statement: lets the business check the bank balance and prepare a Bank Reconciliation Statement later.
- Neither is the basis for original entries because they only re-check information already recorded.
| Item | Amount (RM) |
|---|---|
| List price | 1,000 |
| Less: Trade discount (10%) | 100 |
| Invoice value | 900 |
| Less: Cash discount (5%) | 45 |
| Amount paid | 855 |
List price RM1,000, trade discount 10%, cash discount 5%.
What is the main difference between a source document and a non-source document?
A source document is the basis for recording transactions in the books of prime entry and the ledger, while a non-source document such as the Statement of Account and Bank Statement is used only for checking and reference, not for making entries.
Why is trade discount not recorded in the accounts but cash discount is?
Trade discount is merely a deduction on the list price within the invoice to arrive at the invoice value, so it is not recorded. Cash discount is given for prompt payment and affects the amount of money received or paid, so it is recorded as discount allowed (an expense) or discount received (a revenue).
When are a Debit Note and a Credit Note issued?
A Debit Note is issued by the seller to increase the amount charged, for example when the invoice price was undercharged. A Credit Note is issued to reduce the amount, for example when a customer returns goods or was overcharged.
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