Learning Objectives Recognise an understand the following business documents like invoice, debit note, credit note, statement of account, cheque, receipts in a sale and purchase transactions. Business documents provides an accurate record of business transactions and operations. Used for legal, financial and operational purposes. Help to establish accountability and transparency within an organization. Learning outcomes Students will be able to explain the use of accounting source documents and its application in the business transactions Differentiate among the accounting source documents Explain the relationship between accounting source documents and primary books Business Documents/Source Documents What are business documents? Business documents are all the papers, reports, files, letters and records that are related to the various company activities. They cover information on financial transactions and its records. Business Documents Invoice When a business sells goods on credit it will issue an invoice to the purchaser. Each business has its own style of invoice, but they all contain the following information: • the name and address of the supplier • the name and address of the customer • the date • full details, quantities and prices of the goods supplied. • Sometimes the supplier allows the customer trade discount. This is a reduction in the price of the goods: the rate of this discount often increases according to the quantity purchased (so encouraging customers to buy in bulk). It is also given to businesses in the same trade. Such businesses will not be prepared to pay the full rate as they need to make a profit when they sell the goods. • It is important to distinguish between cash discount and trade discount. Trade discount is shown as a deduction on the invoice. Cash discount is not shown as a deduction from an invoice as it is only allowed if the invoice is paid within a set time limit. Invoice • An invoice is a document issued by the supplier of goods on credit showing details, quantities and prices of goods supplied. • Trade discount is a reduction in the price of goods: the rate often increases according to quantity purchased. The customer receives the original invoice and uses it to record the purchase of good on credit. The supplier keeps a copy of the invoice and uses it to record the sale of goods on credit. Debit Note • A debit note is a document issued by a purchaser of goods on credit to request a reduction in the invoice received. • The customer should check that goods received are in a satisfactory condition and that they are exactly what was ordered (in respect of price, quantity and quality). • The supplier must be informed of any shortages, overcharges and faults. This is done by issuing a debit note to the supplier. Each business has its own style of debit note, but they all contain the following information: Debit Note • the name and address of the supplier • the name and address of the customer • the date • full details and quantities (and sometimes the prices) of the goods returned or overcharged. • When a price is included on a debit note, it is the price which the customer was actually charged for those goods (the price after the deduction of trade discount). On 6 April 20–9 Sew and Sew returned goods to The Weaving Shed and issued the following debit note. • Neither the supplier nor the customer makes any entries in their accounting records in respect of a debit note. • A debit note is merely a request to the supplier to reduce the total of the original invoice. Where there has been an undercharge on an invoice most businesses will issue an additional invoice. However, some businesses may issue a debit note instead. This will be entered in the books of both the supplier and the customer in the same way as the original invoice. Credit Note • A credit note is a document issued by a seller of goods on credit to notify of a reduction in an invoice previously issued. • When goods are returned, reported faulty, or where there has been an overcharge on an invoice, the supplier may issue a credit note. As with all documents, each business has its own style of credit note, but they all contain the following information: • the name and address of the supplier • the name and address of the customer • the date • full details, quantities and prices of the goods returned or overcharged. • To distinguish them from invoices, credit notes are sometimes printed in red. On 6 April 20–9 Sew and Sew returned goods to The Weaving Shed and issued a debit note. The Weaving Shed issued the following credit note to Sew and Sew on 9 April 20–9: The customer receives the original credit note and uses it to record the purchases returns. • The supplier keeps a copy of the credit note and uses it to record the sales returns Statement of Account • A statement of account is a document issued by the seller of goods on credit to summarise the transactions for the month. • At the end of each month, a supplier will usually issue each customer with a statement of account. This is a summary of the transactions for the month. The style of a statement of account may vary, but they all contain the following information: • the name and address of the supplier • • the name and address of the customer • • the date • • the balance owing at the start of the period • invoices and credit notes issued • • payments received • • any cash discounts allowed • • the balance owing at the end of the period. Neither the supplier nor the customer makes any entries in their accounting records in respect of a statement of account. A statement of account is a reminder to the customer of the amount outstanding. This can be checked against the customer’s own records to ensure that no errors have been made by either the supplier or the customer. Cheque • A cheque is a written order to a bank to pay a stated sum of money to the person or business named on the order. • Many accounts are paid by means of a cheque. • Other methods of payment through the banking system are credit transfers and standing orders. • A cheque is a written order to a bank to pay a stated sum of money to the person or business named on the order. • A book of preprinted cheques is issued by the bank, and the customer is only required to complete the necessary details of date, amount and payee (the person or business to whom the money is to be paid). The supplier receives the cheque. A paying-in slip is completed when the cheque is paid into the bank. The counterfoil of this paying-in slip is used to make the entry in the cash book to show the money paid into the bank and to make a note of the discount in the discount allowed column. • The customer keeps the cheque counterfoil and uses it to make the entry in the cash book to show the money paid out of the bank and to make a note of the discount in the discount received column Receipt • A receipt is a written acknowledgement of money received and acts as proof of payment. • Since a cheque passes through the banking system it can act as a receipt, so many businesses do not issue receipts if accounts have been paid by cheque. • Where goods are sold for cash, the customer is usually provided with a receipt. Receipt Summary • A supplier of goods on credit issues an invoice to the customer. • A supplier may allow a customer trade discount if the businesses are in the same trade and also for buying in bulk. • If goods are returned or there is an overcharge, a customer may issue a debit note to the supplier asking for a reduction in the invoice. • A supplier issues a credit note to notify the customer of any reduction in the total of an invoice. • A supplier issues a statement of account at the end of each month to notify the customer of the amount owing and provide a summary of the account. • Many accounts are paid by cheque, in which case it is not necessary to issue a receipt as proof of payment.
