POA @ Hillgrove - Source documents

Source documents

Source documents serve as evidence that transactions have taken place.

Transactions must be recorded based on source documents in accordance to the objectivity theory.

There are 7 source documents.

Summary

This pictures shows the sequence in which the source documents are used in a business.

Note:

For invoice, credit note, debit note and receipt, the Supplier (also known as Seller) is always the party who iSSues (i.e. to Send).

For these source documents, the customer (also known as buyer) is always the party who receives.

There is always more work on the part of the seller than the buyer!

There may not always be credit note and/ or debit note. And a debit note might exist before a credit note.

Invoice

Purpose: To inform credit customers of amount owing.

Note:

There is invoice only if credit purchase/ sale has taken place.
If payment is immediate upon delivery of goods/ provision of service, there will be no invoice.

Journal entries in the supplier's books (Business is supplier if business issued invoice):

Dr Trade receivable : <Credit customer> $x

Cr Sales revenue $x

Dr Cost of sales $y

Cr Inventory $y

Journal entries in the customer's books (Business is customer if business received invoice):

Dr Inventory $x

Cr Trade payable: <Credit supplier> $x

CRedit note

Purpose: To Reduce amount owing by credit customers due to Returns or previous overcharge.

Note:

A credit transaction must first have taken place before there can be a credit note.

Journal entries in the supplier's books (Business is supplier if business issued credit note):

Dr Sales RETURNS $b

Cr Trade receivable : <Credit customer> $b

Journal entries in the customer's books (Business is customer if business received credit note):

Dr Trade payable: <Credit supplier> $b

Cr Inventory $b

Debit note

Purpose: To INCREASE amount owing by credit customers due to previous undercharge.

Note:

A credit transaction must first have taken place before there can be a debit note.

Journal entries in the supplier's books (Business is supplier if business issued debit note):

Dr Trade receivable : <Credit customer> $a

Cr Sales revenue $a

Journal entries in the customer's books (Business is customer if business received debit note):

Dr Inventory $a

Cr Trade payable: <Credit supplier> $a

Payment voucher

Purpose: To get approval from authorised personnel (e.g. Finance Manager, CEO etc) to make payment to credit suppliers

Note:

Payment voucher must be supported by credit supplier’s invoice.
A credit transaction must first have taken place before there can be a payment voucher.

Remittance advice

Purpose: To inform credit supplier that payment by cheque has been made for specific invoice(s)

Note:

A credit transaction must first have taken place and payment must have been approved before there can be a remittance advice.

Tip: In exam, only use "remittance advice" as your answer if business is receiving payment, i.e. business is the credit supplier.

This is because the business receiving payment needs the cheque and the remittance advice so that the business knows which invoices it is receiving payment for.
For the business that is making the payment (i.e. the credit customer):
- - Receipt, payment voucher and bank statement are conclusive evidences that payment has been made.
  - Remittance advice alone is not sufficient evidence that payment has been made.

Receipt

Purpose: To acknowledge that PAYMENT has been received from customer.

2 possible scenarios:

Cash transaction – payment received immediately after delivery of goods/ provision of services
Credit transaction – payment was received some days after delivery of goods/ provision of services

Scenario 1: Cash transaction

Journal entries in the supplier's books (Business is supplier if business issued receipt):

Dr Cash in Hand/ Cash at Bank $x

Cr Sales revenue $x

Dr Cost of sales $y

Cr Inventory $y

Journal entries in the customer's books (Business is customer if business received receipt):

Dr Inventory $x

Cr Cash in Hand/ Cash at Bank $x

Scenario 2: Credit transaction

Journal entries in the supplier's books (Business is supplier if business issued receipt):

Dr Cash in Hand/ Cash at Bank $x

Cr Trade receivable : <Credit customer> $x

Journal entries in the customer's books (Business is customer if business received receipt):

Dr Trade payable: <Credit supplier> $x

Cr Cash in Hand/ Cash at Bank $x

Bank statement

Purpose: Report provided by the bank listing all amounts received into the bank account and all payments out of the bank account for the business to check against and update its own cash at bank ledger account.

Examples of transactions that will be updated in business cash at bank ledger account after checking bank statement:

Dishonoured cheques
Bank charges
Credit transfer (customer pays directly to the business bank account)
Standing order (automatic deduction from business bank account for regular payments such as utilities)