1. 6.2 Source Documents
Accounting 11

2. 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.
Accounting personnel uses bills, customer receipts, and purchase or sales invoices and enters these amounts as journal entries (into a companies general ledger)
For example: Say if you are working for a company as an accounting clerk and your company buys products from another company, the accounting clerk will use the invoice/bills to enter as journal entries. Or in the case receipts it will be entered as a sale.

3. 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.
So this must be on something tangible like a piece of paper, however an I.O.U on a dinner napkin won’t work because the source document has to be a formal company document.
** the exception is if you own your own business you do not need tangible source documentation, when the owner withdraws money.
The paper record would just be a journal entry

4. 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.
For example, a company like the Overwaitea Food Group keeps documents for approximately 5 years in case they need them for future reference (i.e.: auditing)

5. Common Types of Source Documents
Cash Sales Slip
Sales Invoice
Purchase Invoice
Cheque Copies
Cash Receipts Daily Summary
Bank Advices

6. For Our Example Assume you run a company named MASTHEAD MARINE.
In the next few slides you are going to see what different source documents look like, and you are going to assume you run a company named MASTHEAD MARINE.

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

8. Title
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These are examples of what a cash sales slip looks like
A cash sales slip is created when a business sells a product to a customer. One copy of the receipt will go to the customer and the other copy goes to the companies accounting department. The accounting department will use these receipts to enter monthly sales journal entries.
Note the Dome light and Horseshoe Life Ring, these products are the products being sold from your company MASTHEAD MARINE. A copy of this sales slip is sent to the accounting department to be used as a source document.

9. 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.

10. This is an example of MASTHEAD MARINE making a sale to another company
This is an example of MASTHEAD MARINE making a sale to another company. Note that it says in the top left corner of this slide sale of goods or services on account, which means that the company that purchased the products from MASTHEAD MARINE have not yet paid for the products yet. In this case, a copy of the invoice needs to be sent to the shipping department, and the shipping department will use this invoice to know what products need to be shipped out to customer
Down below it shows that there is a customer copy, accounting department copy, shipping department copy, and file copy.
The customer copy is for the customers records
The accounting departments copy is to make a journal entry
The shipping departments copy is to know where and what needs to be shipped to the customer
And the file copy is for general reference

11. 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)

12. Purchase invoice is for something MASTHEAD MARINE is purchasing from another company, and in this case the other company is General Engineering
The copy of the purchase invoice goes to MASTHEAD MARINE’s accounting department, where they will record their payment as a journal entry.

13. 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.
In the case of Masthead Marine, if they are purchasing a product from General Engineering they will send out a company cheque to pay for the product and keep a copy for future supporting documentation.

14. 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
This is an example of a copy of the cheque that Masthead Marine would keep on file.
For example, if a company says Masthead has not paid for a purchase invoice, all Masthead Marine would have to do is go into their cheque copy file and find it for evidence that the payment was made on the product(s).

15. In the case of Masthead Marine, if they are purchasing a product from General Engineering they will send out a company cheque to pay for the product and keep a copy for future supporting documentation.

16. 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.

17. Here is an example of a Cash Receipts Daily Summary
Here is an example of a Cash Receipts Daily Summary. You can see that there are 3 different individual cash receipts that are complied all onto this one Cash Receipts Daily Summary report. This makes it easier for a company to be more organized because instead of going through a bunch of daily cash receipts, the company’s accounting department will have one report of what was sold during the day and one point of reference to refer ro. This makes things more organized and easier for a company’s accounting department and they will be less prone to error when making a journal entry.

18. 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.
The bank advice is essentially a notification saying that there has been a change to the bank account.

19. 2 Types of Bank Advices Bank Debit Advice Bank Credit 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.
Bank debit advice - a notification from the bank when your business account decreases for interest owed to the bank.
Bank credit advice – this is the opposite of the bank debit advice, the credit advice is when you are earning interest on the money your business has in the bank and the bank sends notification saying your account has increased.

20. In this example, the bank has deducted interest on the company’s bank account for amounts owed on the line of credit. On the bank advice it will usually shows an explanation for the bank advice, it will also show whether the account has been debited or credited.

21. Title
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This is just a summary of everything we just talked about
Cash sales slip – which is just a cash receipt for a sale of a products/service
Sales invoice – company sells a product on credit and they send this invoice so the purchasing company can make a payment.
Cash receipts daily summary - is a summary of the cash sales for the day. This makes things more organized and easier for the accounting department
Bank debit advice - a notification from the bank when your business account decreases for interest owed to the bank.
Bank credit advice – a notification saying your account has increased.
Purchase invoice – this is when your business is purchasing something on account from another company. ** Different company’s have different term of payments. A common one is company’s will have 30 days to make a payment.
Cheque copy – to close the payable of the purchase invoice, as discusses in the purchase invoice. After the terms of payment are due a company will send out a cheque for payment and then the accounting department will close the payable.

22. 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.
The accountants records things businesses buy at the price they paid for it.
For example, if business land increases in value you cannot adjust this value, it will stay in the accounting books (i.e.: general ledger) of what the business actually paid for it.

23. Your Homework for Today
Review Questions 1-25 on page