Step-by-step breakdown of source documents and

their uses:

1. Definition of Source Documents

Source documents are the original records that capture business
transactions. They provide the initial evidence that a transaction
has taken place and serve as the starting point for the accounting
process.
2. Types of Source Documents
Invoice: Sent by a seller to a buyer to request payment for goods
or services provided. It includes details such as date, amount,
description of items, and payment terms.
Credit Note: Issued when goods are returned or if there has
been an overcharge. It acts as a reverse invoice, reducing the
amount owed by the buyer.
Debit Note: Issued by the buyer to the seller as a formal request
for a credit note, often due to returned goods or errors.
Receipt: Acknowledges payment received, confirming that the
buyer has paid the seller. It shows the date, amount, and mode of
payment.
Bank Statement: Provides a summary of all bank transactions,
helping to verify cash transactions and reconcile bank balances.
Cash Memo: Used in cash transactions where the seller issues a
document to the buyer as proof of the sale.
Purchase Order: A buyer’s formal request to a supplier for
specific goods or services, detailing quantity and agreed prices.
Cheque: A document instructing a bank to pay a specified
amount from the issuer's account to a named individual or
business.
3. Uses of Source Documents
Recording Transactions: They provide details needed to accurately
record each transaction in the books.
Verification: Source documents act as evidence for auditing
purposes, helping verify entries in the ledger.
Internal Control: They aid in managing and controlling business
finances, providing accountability for transactions.
Tax Purposes: They serve as proof of transactions for tax filings
and ensure compliance with tax regulations.
Dispute Resolution: In cases of disagreements, source
documents can provide clarity, as they contain the original
transaction details.
4. Link to Books of Prime Entry
Each type of source document is used to enter transactions into
specific books of prime entry, such as the sales journal (invoices),
purchases journal, and cash book (receipts and cheques). This
process ensures accuracy before finalizing entries in the ledger
accounts.
Source documents are essential for creating reliable financial
records, ensuring both accuracy and accountability in accounting
practices.

Some Questions and Answers on Source

Documents
1. What is a source document?
Answer: A source document is an original record that provides
evidence of a business transaction. It is the starting point for
recording transactions in the accounting process.
2. Why are source documents important in accounting?
Answer: Source documents provide proof of transactions, which is
essential for accurate record-keeping, auditing, and tax purposes.
They ensure that the financial records are complete and
verifiable.
3. What information is typically found on a source
document?
Answer: Common details include the date of the transaction,
names of the buyer and seller, a description of goods or services,
quantities, unit prices, total amount, and payment terms.

4. Name five common types of source documents and

briefly explain each.
Answer:
Invoice: A bill issued by a seller to a buyer, detailing items sold
and requesting payment.
Receipt: Proof that payment has been made by the buyer to the
seller.
Credit Note: Issued by a seller to acknowledge a return of goods
or a refund, reducing the buyer’s balance.
Debit Note: A request by the buyer to the seller for a credit note,
usually when returning goods.
Bank Statement: A document from the bank listing all
transactions in an account over a period.
5. What is the purpose of an invoice in accounting?
Answer: An invoice is used to request payment from a buyer for
goods or services provided. It serves as evidence of the
transaction and records details necessary for bookkeeping.
6. How does a credit note differ from an invoice?
Answer: An invoice requests payment for goods or services, while
a credit note is issued to cancel part or all of an invoice due to
returned goods or an overcharge. The credit note reduces the
amount the buyer owes.
7. What is a debit note, and when is it used?
Answer: A debit note is issued by a buyer to formally request a
reduction in the amount owed to a seller, typically due to the
return of goods or an error in billing.
8. How does a receipt help in accounting?
Answer: A receipt confirms that payment has been received,
helping to verify cash transactions and ensuring accurate
recording in the cash book or bank records.
9. What role does a bank statement play as a source
document?
Answer: A bank statement provides a summary of all transactions
in a bank account, such as deposits and withdrawals. It is used to
verify entries in the cash book and reconcile bank balances.

10. Which source document would you use to verify a cash

sale?
Answer: A cash memo or receipt is typically used to verify a cash
sale, as it provides proof of payment at the point of sale.
11. How are source documents linked to the books of
prime entry?
Answer: Each source document is recorded in a specific book of
prime entry: invoices in the sales journal, receipts and cheques in
the cash book, credit notes in the returns journal, and so on.
12. Why is it important to keep source documents for
auditing purposes?
Answer: Source documents provide evidence of transactions,
making it possible for auditors to verify the accuracy and
authenticity of a business’s financial records.
13. What might happen if a business fails to keep proper
source documents?
Answer: Without source documents, a business’s financial records
could be inaccurate or incomplete, which may lead to audit
issues, tax penalties, and challenges in resolving disputes.
14. How does a purchase order function as a source
document?
Answer: A purchase order is issued by a buyer to a seller as an
official request for goods or services. It confirms the quantity,
price, and terms, ensuring both parties agree before the
transaction occurs.
15. In what scenarios would a business issue a credit
note?
Answer: A business issues a credit note when a buyer returns
goods, if goods are damaged, or if there is an overcharge on the
original invoice. It reduces the amount the buyer owes to the
seller.