Business documents
The Role of Source Documents
Source documents are the original records that provide evidence of a business transaction. They are the starting point for accounting because they contain the factual details (who, what, when, how much) needed to record entries in the books of prime entry and ledgers.
Every financial transaction must be supported by a source document to ensure accuracy and allow for auditing. Without these documents, there is no proof that a transaction occurred.
Learning Objective 3: Production and Recording
Business documents can be produced and recorded in two ways:
Business documents can be produced and recorded in two ways:
- Manually: Written by hand on pre-printed forms (e.g., a handwritten receipt or a cheque written with a pen). This is common in small businesses or for specific items like paying-in slips.
- Digitally: Generated automatically by computer systems (e.g., an invoice printed from accounting software, a digital bank statement, or a POS-generated receipt).
Note: In exams, you must be able to identify the document regardless of whether it is manual or digital.
Invoice
A detailed list of goods or services supplied, sent by the seller to the buyer, stating the amount owed.
- Issued by: Seller (Supplier)
- Received by: Buyer (Customer)
- Source Document For: Sales Journal (for the seller) and Purchases Journal (for the buyer).
Debit Note
A document sent to inform another party that their account has been debited (increased in debt).
- Issued by: Buyer (Customer)
- Received by: Seller (Supplier)
- Purpose: Used when the buyer returns goods or claims a reduction in price due to damaged/incorrect goods. It tells the supplier, "I am deducting this amount from what I owe you."
- Source Document For: Purchases Returns Journal (for the buyer).
Debit Note vs. Credit Note Confusion
Context: When goods are returned, students often confuse who issues which note.
Why examiners accept this: In Cambridge IGCSE Accounting, the standard flow for returns is: The buyer sends a Debit Note to say they have debited their purchases account (reducing what they owe). The seller then sends a Credit Note to confirm they have credited the buyer's account.
Example: If you buy goods and return them, you issue a Debit Note. Do not assume the seller issues the first document in this specific chain; the buyer initiates the debit.
Why examiners accept this: In Cambridge IGCSE Accounting, the standard flow for returns is: The buyer sends a Debit Note to say they have debited their purchases account (reducing what they owe). The seller then sends a Credit Note to confirm they have credited the buyer's account.
Example: If you buy goods and return them, you issue a Debit Note. Do not assume the seller issues the first document in this specific chain; the buyer initiates the debit.
Credit Note
A document sent by the seller to the buyer, stating that the buyer's account has been credited (reduced in debt).
- Issued by: Seller (Supplier)
- Received by: Buyer (Customer)
- Purpose: Acknowledges a return of goods or allows for a discount/price reduction. It proves the buyer owes less money.
- Source Document For: Sales Returns Journal (for the seller).
Cheque Counterfoil
The small stub left in the cheque book after a cheque is written. It records the details of the payment made.
- Issued by: The payer (who writes the cheque)
- Source Document For: Cash Book (Payments side). It proves that a cheque was issued and to whom.
Paying-in Slip
A form completed by the customer when depositing cash or cheques into their bank account.
- Issued by: The depositor (customer)
- Source Document For: Cash Book (Receipts side). It proves that money was deposited into the bank.
Receipt
A written acknowledgment that a sum of money has been received.
- Issued by: The recipient (seller or service provider)
- Received by: The payer (buyer)
- Source Document For: Cash Book (Receipts side). It is proof of payment, often used for small cash transactions.
Bank Statement
A document sent by the bank to the customer, showing all transactions in the account over a period.
- Issued by: The Bank
- Received by: The Customer (business)
- Source Document For: Bank Reconciliation Statement. It is used to check if the business's cash book matches the bank's records.
Statement of Account
A document sent by a seller to a credit customer, showing all transactions (invoices, credit notes, payments) between them over a period and the outstanding balance.
- Issued by: The Seller (Supplier)
- Received by: The Buyer (Customer)
- Source Document For: Checking accuracy of the debtor's account. It helps the customer verify they owe the correct amount.
⚠︎ Confusing Debit and Credit Notes in Returns
The Error: Students often think the seller issues a Debit Note when goods are returned.
The Correct Understanding: When a buyer returns goods, they issue a Debit Note to reduce their liability. The seller then issues a Credit Note to acknowledge the reduction in the amount owed. Remember: The buyer debits their purchases (reducing expense), so they send a debit note.
The Correct Understanding: When a buyer returns goods, they issue a Debit Note to reduce their liability. The seller then issues a Credit Note to acknowledge the reduction in the amount owed. Remember: The buyer debits their purchases (reducing expense), so they send a debit note.
⚠︎ Misidentifying Source Documents for Bank Transactions
The Error: Thinking a 'Receipt' is the source document for bank deposits.
The Correct Understanding: A receipt proves cash was received by the business. A Paying-in Slip is the specific source document for recording that cash/cheque was deposited into the bank. Similarly, a Cheque Counterfoil is the source for payments made by cheque, not just a 'payment voucher'.
The Correct Understanding: A receipt proves cash was received by the business. A Paying-in Slip is the specific source document for recording that cash/cheque was deposited into the bank. Similarly, a Cheque Counterfoil is the source for payments made by cheque, not just a 'payment voucher'.
Identifying Documents in Multiple Choice Questions
Context: When asked to identify a document based on its function.
Why examiners accept this: Examiners look for the direction of flow (who sends to whom) and the purpose (payment, return, or proof).
Example: If the question says 'A document sent by the bank showing transactions', the answer is Bank Statement. If it says 'A document sent by the seller to a customer showing the balance owed', the answer is Statement of Account. Do not confuse these two; one comes from the bank, the other from the supplier.
Why examiners accept this: Examiners look for the direction of flow (who sends to whom) and the purpose (payment, return, or proof).
Example: If the question says 'A document sent by the bank showing transactions', the answer is Bank Statement. If it says 'A document sent by the seller to a customer showing the balance owed', the answer is Statement of Account. Do not confuse these two; one comes from the bank, the other from the supplier.
Calculating Balances on a Statement of Account
Context: When asked to calculate the closing balance from a statement.
Why examiners accept this: You must treat the statement as a ledger account. Debits (amounts owed by customer) increase the balance; Credits (payments/returns) decrease it.
Example: If the opening balance is 100 (debit), and the customer pays20, the new balance is 80. If the customer returns goods worth5, the balance becomes $75. Always follow the logic: Opening Balance + Debits - Credits = Closing Balance.
Why examiners accept this: You must treat the statement as a ledger account. Debits (amounts owed by customer) increase the balance; Credits (payments/returns) decrease it.
Example: If the opening balance is 100 (debit), and the customer pays20, the new balance is 80. If the customer returns goods worth5, the balance becomes $75. Always follow the logic: Opening Balance + Debits - Credits = Closing Balance.
Identifying Source Documents
Q:
Which business document is issued by a seller to a buyer to request payment for goods sold on credit?
A:
Invoice
Q:
A customer returns damaged goods to a supplier. Which document does the customer issue to inform the supplier of this return?
A:
Debit note
Q:
Which document is sent by the bank to a customer showing all transactions in their account?
A:
Bank statement
Using Documents as Sources of Information
Q:
State the book of prime entry that uses an invoice as its source document for a seller.
A:
Sales journal
Q:
Which document would a business use to check if a cheque they received has cleared their bank account?
A:
Bank statement
Q:
A customer receives a document from their supplier listing all invoices and payments during the month. What is this document called?
A:
Statement of account