6.2 Source DocumentsAccounting 11

Source Documents

• As you have learned from Ch. 6.1, transactions are first recorded by accounting personnel as journal entries.

• But where is the information obtained? • Bills• Customer Receipts• Purchases or Sales Invoices etc…

• These papers are the records used by accountants to record transactions.

Definition of Source Document

• Are papers/records that shows the nature of a transaction & provides all information needed to account for a transaction done by a business.

• Has to be something tangible (able to touch) & shows a contract between 2 parties.• Can’t be an I.O.U on a dinner napkin.• Only exception is when there is an internal business

dealing within a company.• Ex. Owner withdraws money.• There still needs to be some type of paper record.

How long does a business have to keep Source Documents???

• Most companies are required to keep documents for 3-7 years (depends on area’s tax laws).

• They are kept for reference purposes, for locating errors, or proof of a transaction.

Common Types of Source Documents

1. Cash Sales Slip2. Sales Invoice3. Purchase Invoice4. Cheque Copies5. Cash Receipts Daily Summary6. Bank Advices

For Our Example

• Assume you run a company named MASTHEAD MARINE.

Cash Sales Slip

• Is a business form showing details of a transaction in which goods or services are sold to customer for CASH.

Title

• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.

• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.

Sales Invoice

• Many businesses do not deal directly with the general public & therefore do not normally have cash sales.

• These types of businesses usually make all their sales on account (A/R).

• For these types of transactions a Sales Invoice document will be used instead of a Cash Sales Slip.

Purchase Invoice• Are receipts for when a company makes

purchases for goods/services.

• A company can purchase something in 2 ways:– They pay Cash– They pay on Account (A/P)

Cheque Copies

• For most businesses, the most common method of making payments is by issuing a company cheque.

• The reason this is done is because cheques leave a ‘paper trail’ or record of transaction.

• A CHEQUE COPY is a document supporting the accounting entry for a payment by cheque.

Cheque Copies

• Cheques can be issued for many reasons:– Cash purchases– Payment of Staff Wages/Salaries– Owner’s Withdrawals– Payments on accounts for Purchase Invoices– Etc…

• A cheque by itself is NOT sufficient proof of a transaction, it must be accompanied with a receipt to prove purchase/payment

Cash Receipts Daily Summary (Definition)

• Is a business paper that lists the money coming in each day from their customers.

• This document shows:– Names of Customers– Dollar Amounts– What is being paid for in each case.

Bank Advices

• There will be times when your Bank automatically initiates a change in your bank account or the business bank account.

• The bank must legally inform you of this by sending you a document called a Bank Advice.

2 Types of Bank Advices

• Bank Debit Advice– a bank document informing the business of a

DECREASE made in the business’s bank account.

• Bank Credit Advice– a bank document informing the business of an

INCREASE made in the business’s bank account.

Title

• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.

• Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Vivamus et magna. Fusce sed sem sed magna suscipit egestas.

GAAP – COST PRINCIPLE

• States that the accounting for purchases must be at the cost price to the purchaser.

• You cannot change the value of an asset if it becomes more/less value after you purchase it.

• You record it on your books at the price you paid for it.

Your Homework for Today

• Review Questions 1-25 on page 173 -174