1. Accounting & Financial Analysis 11 Lecture 2 Source Documents

2. Introduction to Accounting Business Transactions Source Documents GST Business Transactions Source Documents GST

3. What is a business transaction ? A business transaction is an activity that involves the receipt or payment of money Therefore every purchase or sale that a business makes is a transaction every time a business pays wages to its employees the business is completing a transaction. A business transaction is an activity that involves the receipt or payment of money Therefore every purchase or sale that a business makes is a transaction every time a business pays wages to its employees the business is completing a transaction.

4. What is a business transaction ? Each business transaction requires an entry (to be written down) in the records (accounts) of the business.

5. Keeping proper financial records If a business is to succeed it has to maintain proper accounting records which will provide information for the managers to make the correct decisions.

6. Keeping proper financial records Calculate income and expenses correctly (Income – expenses = profit) Better control of the business. Understand and improve the business performance. Calculate income and expenses correctly (Income – expenses = profit) Better control of the business. Understand and improve the business performance.

7. Keeping proper financial records ctd. Plan business direction and expansion. Well kept records makes it easier to obtain finance. Provides warning to management in the event of: business loss, theft, or other inappropriate activities. Plan business direction and expansion. Well kept records makes it easier to obtain finance. Provides warning to management in the event of: business loss, theft, or other inappropriate activities.

8. What are source documents? Source documents are the evidence that a business transaction has taken place. Any document that is back-up to an entry in the accounts is a source document. Source documents are the evidence that a business transaction has taken place. Any document that is back-up to an entry in the accounts is a source document.

9. What are source documents ctd.? Source means “ The place from which things originate (start)” The source documents help to record the transactions that take place within an organization (business) and it is from the source documents that the “Financial Records” are developed. Source means “ The place from which things originate (start)” The source documents help to record the transactions that take place within an organization (business) and it is from the source documents that the “Financial Records” are developed.

10. Are source documents important? Source documents are important to the business and should be checked carefully to confirm their accuracy and that they meet company and legislative requirements. All source documents relating to an individual transaction should be attached together and filed in proper order. Source documents are important to the business and should be checked carefully to confirm their accuracy and that they meet company and legislative requirements. All source documents relating to an individual transaction should be attached together and filed in proper order.

11. Stock source documents The ordering of stock will involve various source documents that relate to the transaction: The stores requisition The purchase order The supplier delivery note The stores receipt note The tax invoice The ordering of stock will involve various source documents that relate to the transaction: The stores requisition The purchase order The supplier delivery note The stores receipt note The tax invoice

12. Document Procedures Businesses should have established procedures indicating the process to create and authorise documents. Before processing documents all details have to be checked to make sure that they are correct. Businesses should have established procedures indicating the process to create and authorise documents. Before processing documents all details have to be checked to make sure that they are correct.

13. Document Procedures - points to look for: Purchase invoices Type of document to be processed – Tax Invoice, Credit note, etc. Name and address of supplier including ABN Date and invoice number Does tax invoice match the purchase order Is the quantity and price correct Purchase invoices Type of document to be processed – Tax Invoice, Credit note, etc. Name and address of supplier including ABN Date and invoice number Does tax invoice match the purchase order Is the quantity and price correct

14. Document Procedures – Purchase Invoices ctd. Is GST included in the charge or separate Is the total charge correct What are the terms of trade Check receipt details if goods are purchased for cash If paid by cheque confirm details on cheque butts are accurate Is GST included in the charge or separate Is the total charge correct What are the terms of trade Check receipt details if goods are purchased for cash If paid by cheque confirm details on cheque butts are accurate

15. Document Procedures - points to look for: Sales invoices All sales invoices have to be checked to confirm they meet customer order and are mathematically correct. Sales invoices have to be printed in duplicate (one for customer and the other for business records) Confirm customer requirements Confirm quantity and price charged Confirm GST charged Sales invoices All sales invoices have to be checked to confirm they meet customer order and are mathematically correct. Sales invoices have to be printed in duplicate (one for customer and the other for business records) Confirm customer requirements Confirm quantity and price charged Confirm GST charged

16. Document Procedures – Sales Invoices ctd. Confirm totals inclusive of GST Confirm the trade terms Confirm dispatch of goods Confirm credit status of customer (no accounts outstanding beyond trade terms). Sales invoices should be authorised for issue (validated, checked and signed) Confirm totals inclusive of GST Confirm the trade terms Confirm dispatch of goods Confirm credit status of customer (no accounts outstanding beyond trade terms). Sales invoices should be authorised for issue (validated, checked and signed)

17. Sales invoices ctd. If a sales invoice is found to be incorrect it should be corrected before posted to customer. If the invoice has already been posted a manager or supervisor should contact the customer in accordance with the company policy and procedures. If a sales invoice is found to be incorrect it should be corrected before posted to customer. If the invoice has already been posted a manager or supervisor should contact the customer in accordance with the company policy and procedures.

18. Access and review financial information Financial information is developed from source documents that are processed to the JOURNALS and summarised in the GENERAL LEDGER under appropriate account headings. It is the allocation of expenses to account headings that makes it possible to monitor business activity and to compare the actuals to the budget forecast. When comparing certain activity reports we may need to re-visit the source documents in order to confirm the data in the financial reports. Financial information is developed from source documents that are processed to the JOURNALS and summarised in the GENERAL LEDGER under appropriate account headings. It is the allocation of expenses to account headings that makes it possible to monitor business activity and to compare the actuals to the budget forecast. When comparing certain activity reports we may need to re-visit the source documents in order to confirm the data in the financial reports.

19. Therefore financial information is: Collected from source documents. Analysed according to their nature. Processed to the journals. Organised under appropriate account headings. Develop report for management review. Maintain timelines in accordance with organizational policy and financial reporting periods. Collected from source documents. Analysed according to their nature. Processed to the journals. Organised under appropriate account headings. Develop report for management review. Maintain timelines in accordance with organizational policy and financial reporting periods.

20. Source Documents Source documents are the evidence that a business transaction has taken place. Any document that is back- up to an entry in the accounts is a source document. Source means “ The place from which things originate (start)” The source documents help to record the transactions that take place within an organization (business) and it is from the source documents that the “Financial Records” are developed. Source documents are therefore important to the business and should be checked carefully to confirm their accuracy and that they meet company and legislative requirements. All source documents relating to an individual transaction should be attached together and filed in proper order. Source documents are the evidence that a business transaction has taken place. Any document that is back- up to an entry in the accounts is a source document. Source means “ The place from which things originate (start)” The source documents help to record the transactions that take place within an organization (business) and it is from the source documents that the “Financial Records” are developed. Source documents are therefore important to the business and should be checked carefully to confirm their accuracy and that they meet company and legislative requirements. All source documents relating to an individual transaction should be attached together and filed in proper order.

21. Examples of source documents Stores requisition order Business Purchase Order (issued to supplier) Supplier’s Delivery note (to be signed as evidence of receipt) Supplier’s Tax Invoice. Supplier’s Statement of Account. Cheque Butts to confirm payment of invoices or expenses. Customer Purchase Order. Business Tax Invoice (issued to customer). Statement of Account issued to customer. Cheque Deposit Listing (list of cheques being deposited into bank account) Bank Statement (to pick-up direct entries by bank – eg. Bank charges, bank interest paid/earned, direct debits etc.) Stores requisition order Business Purchase Order (issued to supplier) Supplier’s Delivery note (to be signed as evidence of receipt) Supplier’s Tax Invoice. Supplier’s Statement of Account. Cheque Butts to confirm payment of invoices or expenses. Customer Purchase Order. Business Tax Invoice (issued to customer). Statement of Account issued to customer. Cheque Deposit Listing (list of cheques being deposited into bank account) Bank Statement (to pick-up direct entries by bank – eg. Bank charges, bank interest paid/earned, direct debits etc.)

22. Checking source documents If a source document is not correct it has to be given to the supervisor/manager to: Check the reason for the error Check quantity and price Confirm receipt of items Adjust the error if internal Contact supplier if external error Authorise adjustment – by company authorised person Process document If a source document is not correct it has to be given to the supervisor/manager to: Check the reason for the error Check quantity and price Confirm receipt of items Adjust the error if internal Contact supplier if external error Authorise adjustment – by company authorised person Process document

23. Adjusting Source Documents Any adjustments to source documents have to be authorised by an appointed person as per the Policy & Procedures of the company. There is usually a list of authorised persons indicating their: Name Position Sample of signature ‘$’ Limit of authorisation Any adjustments to source documents have to be authorised by an appointed person as per the Policy & Procedures of the company. There is usually a list of authorised persons indicating their: Name Position Sample of signature ‘$’ Limit of authorisation

24. Examples of source documents an invoice received after shopping is a source document, a purchase order is a source document, a cheque book, a deposit book, a cheque requisition, a bank statement, all expense vouchers, credit notes, these are all source documents. an invoice received after shopping is a source document, a purchase order is a source document, a cheque book, a deposit book, a cheque requisition, a bank statement, all expense vouchers, credit notes, these are all source documents.

25. Purchase invoices We are all familiar with the receipt of invoices (bills) such as telephone bills, electricity bills, gas bills, invoices for purchases such as stationery, service/repairs to motor vehicle, etc. Each one of these bills/invoices is a source document and relates to our expenditure It shows the cost, the GST amount, and the total amount paid or owing to the creditor (accounts payable). We are all familiar with the receipt of invoices (bills) such as telephone bills, electricity bills, gas bills, invoices for purchases such as stationery, service/repairs to motor vehicle, etc. Each one of these bills/invoices is a source document and relates to our expenditure It shows the cost, the GST amount, and the total amount paid or owing to the creditor (accounts payable).

26. Purchase Order A business writes out a purchase order each time it requires a Service or to purchase an item. The purchase order will show: The reference number of the purchase order. Name of the business making the order. The person authorising the issue of the order. The name of the supplier. The quantity ordered. The price per item (service) as agreed beforehand. The total charge inclusive of GST. Other comments – such as date of delivery A business writes out a purchase order each time it requires a Service or to purchase an item. The purchase order will show: The reference number of the purchase order. Name of the business making the order. The person authorising the issue of the order. The name of the supplier. The quantity ordered. The price per item (service) as agreed beforehand. The total charge inclusive of GST. Other comments – such as date of delivery

27. Why use a Purchase Order? The purchase order will be used to confirm the accuracy of the tax invoice when received and will be attached to the invoice for filing.

28. Sales invoices In the same way, if we are in business and sell our products we issue a tax invoice showing: the amount of sales, the GST and The total amount paid to us or owing by the debtor (accounts receivable). In the same way, if we are in business and sell our products we issue a tax invoice showing: the amount of sales, the GST and The total amount paid to us or owing by the debtor (accounts receivable).

29. Sales invoices ctd. A sales invoice should be issued as close to the sale date as possible since most Credit terms indicate required payment after a certain number of days from date of invoice. A sales invoice should be issued as close to the sale date as possible since most Credit terms indicate required payment after a certain number of days from date of invoice.

30. Outstanding Accounts All accounts receivable need to be checked Regularly to confirm that they are within their trading terms. If accounts receivable are left uncollected the business will suffer negative cash flow and will not be able to pay its own expenses such as wages, rent, suppliers etc. All accounts receivable need to be checked Regularly to confirm that they are within their trading terms. If accounts receivable are left uncollected the business will suffer negative cash flow and will not be able to pay its own expenses such as wages, rent, suppliers etc.

31. Outstanding Accounts ctd. If accounts receivable are left uncollected the business: will suffer negative cash flow and will not be able to pay its own expenses such as wages, rent, suppliers etc. If accounts receivable are left uncollected the business: will suffer negative cash flow and will not be able to pay its own expenses such as wages, rent, suppliers etc.

32. Outstanding Accounts ctd. The business will lose its credit rating with its suppliers and will not be allowed credit on future purchases. It will also have to pay interest on overdue accounts affecting its profit margin The business will lose its credit rating with its suppliers and will not be allowed credit on future purchases. It will also have to pay interest on overdue accounts affecting its profit margin

33. Credit notes A credit note is issued to a customer when the goods sold do not meet the expectations of the customer and they are returned to the store. The goods could have been damaged not according to specifications( wrong model, colour etc), or in excess of requirements. In the same way a credit note can be received by the business for goods that the Business returned to the supplier. A credit note is issued to a customer when the goods sold do not meet the expectations of the customer and they are returned to the store. The goods could have been damaged not according to specifications( wrong model, colour etc), or in excess of requirements. In the same way a credit note can be received by the business for goods that the Business returned to the supplier.

34. Evidence of payments Other source documents relate to evidence of payment, such as: cheque book butts, credit card vouchers, EFTPOS receipts, written receipts for cash payments, bank a/c statements Showing the direct debits to the account. Other source documents relate to evidence of payment, such as: cheque book butts, credit card vouchers, EFTPOS receipts, written receipts for cash payments, bank a/c statements Showing the direct debits to the account.

35. Evidence of receipts Are documents that record cash or cheques received by the business; listings of cheques deposited to our bank a/c the bank a/c statements that show direct credits Are documents that record cash or cheques received by the business; listings of cheques deposited to our bank a/c the bank a/c statements that show direct credits

36. Evidence of receipts ctd. the cash till roll, the receipt book which is a copy of the receipt given to the customer the cash till roll, the receipt book which is a copy of the receipt given to the customer

37. What is GST ? GST stands for “Goods and Service Tax” it is a TAX imposed by government on all commercial transactions and is payable to the Australian Tax Office (ATO) GST stands for “Goods and Service Tax” it is a TAX imposed by government on all commercial transactions and is payable to the Australian Tax Office (ATO)

38. Who does the GST belong to? The GST amount that the business collects on all of its sales does not belong to the business it is merely collected by the business on behalf of the ATO and it is a debt owing to the ATO (liability).

39. Is GST deductible? Any GST that the business pays on expenses for business use is allowed as a deduction from the amounts owing to the ATO.

40. How much is the GST? The current rate of GST is 10% on sales value.

41. How do I work out GST? If the sales value is inclusive of GST then you have to divide the total amount by 11 in order to get the GST amount.

42. How do I account for GST? GST payable a/c GST payable a/c = GST owing to ATO (on sales) Liability – Credit Input Tax Credits a/c Input Tax Credits a/c = GST owing to the business by the ATO (on purchases) Assets - Debit GST payable a/c GST payable a/c = GST owing to ATO (on sales) Liability – Credit Input Tax Credits a/c Input Tax Credits a/c = GST owing to the business by the ATO (on purchases) Assets - Debit

43. Example of GST If a business sells a computer for $1,800 what is the amount of GST that the business has to collect? What if the computer is sold for $2,300? If you purchased an MP3 for the total cost of $418 how much GST did you pay? If you purchased a pair of shoes for $110 how much GST did you pay? If a business sells a computer for $1,800 what is the amount of GST that the business has to collect? What if the computer is sold for $2,300? If you purchased an MP3 for the total cost of $418 how much GST did you pay? If you purchased a pair of shoes for $110 how much GST did you pay?

44. How does a business make a profit ? An individual will open a business, or invest in a business, for the purpose of making a PROFIT. The reason a person opens a restaurant is not to feed people but to make a profit from the sale of meals and beverages. The success of the business depends on the quantity of sales, the more sales (number of meals) the more income (revenue) the business receives. Of course, in order to earn the income the business will also have expenses. An individual will open a business, or invest in a business, for the purpose of making a PROFIT. The reason a person opens a restaurant is not to feed people but to make a profit from the sale of meals and beverages. The success of the business depends on the quantity of sales, the more sales (number of meals) the more income (revenue) the business receives. Of course, in order to earn the income the business will also have expenses.

45. Expenses Example: The restaurant must buy the meat, fish, vegetables, fruit, tea, coffee, wine, must pay the wages of the chef, kitchen staff and waiters, must also pay the rent for the restaurant, the gas, electricity and telephone etc.

46. What is profit? Revenue – expenses = PROFIT All the revenue and expenses will have to be recorded in the “Ledgers” in order to be able to calculate the profit. The system for recording these transactions is known as ACCOUNTING Revenue – expenses = PROFIT All the revenue and expenses will have to be recorded in the “Ledgers” in order to be able to calculate the profit. The system for recording these transactions is known as ACCOUNTING

47. What is the scope and purpose of Accounting ? Accounting is a means of: recording financial transactions, and summarising the effect of these transactions in the Financial Reports with the aim of calculating the profit earned during the accounting period and showing the financial stability of the entity Accounting is a means of: recording financial transactions, and summarising the effect of these transactions in the Financial Reports with the aim of calculating the profit earned during the accounting period and showing the financial stability of the entity

48. Where do we record the financial transactions ? All the financial transactions are recorded in the JOURNALS at the end of the month the totals are transferred to the GENERAL LEDGER. All the financial transactions are recorded in the JOURNALS at the end of the month the totals are transferred to the GENERAL LEDGER.

49. What is a general ledger ? A general ledger is a combination of accounts that make up the financial statements of a business. It is where all business transactions are recorded under their appropriate account headings. A general ledger is a combination of accounts that make up the financial statements of a business. It is where all business transactions are recorded under their appropriate account headings.