Topic 01: Business Documents and Books of Prime Entry

TOPIC 01
BUSINESS DOCUMENTS & BOOKS OF PRIME ENTRY

1. The Role of Source Documents (Business Documents)

Business transactions are recorded on source documents. Examples include sales and purchase orders,
invoices and credit notes.

1.1 Types of source documents

Whenever a business transaction takes place, involving sales or purchases, receiving or paying money, or
owing or being owed money, it is usual for the transaction to be recorded on a document. These documents
are the source of all the information recorded by a business.

Documents used to record the business transactions in the 'books of account' of the business include the
following.

(a) Quotation. A document sent to a customer by a company stating the fixed price that would be charged to
produce or deliver goods or services. Quotations tend to be used when businesses do not have a standard
listing of prices for products, for example when the time, materials and skills required for each job vary
according to the customer's needs. Quotations can't be changed once they have been accepted by the
customer.

(b) Purchase order. A document of the company that details goods or services which the company wishes to
purchase from another company. Two copies of a purchase order are often made, one is sent to the company
from which the goods or services will be purchased, and the other is kept internally so the company can keep
track of its orders. Purchase orders are often sequentially numbered.

(c) Sales order. A document of the company that details an order placed by a customer for goods or
services. The customer may have sent a purchase order to the company from which the company will then
generate a sales order. Sales orders are usually sequentially numbered so that the company can keep track
of orders placed by customers.

(d) Goods received note. A document of the company that lists the goods that a business has received from
a supplier. A goods received note is usually prepared by the business's own warehouse or goods receiving
area. This is discussed further below.

(e) Goods despatched note. A document of the company that lists the goods that the company has sent out
to a customer. The company will keep a record of goods despatched notes in case of any queries by
customers about the goods sent. The customer will compare the goods despatched note to what they receive
to make sure all the items listed have been delivered and are the right specification.

(f) Invoice. This is discussed further below.

(g) Statement. A document sent out by a supplier to a customer listing the transactions on the customer's
account, including all invoices and credit notes issued and all payments received from the customer. The
statement is useful, as it allows the customer to reconcile the amount that they believe they owe the supplier
to the amount the supplier believes they are owed. Any differences can then be queried.

(h) Credit note. A document sent by a supplier to a customer in respect of goods returned or overpayments
made by the customer. It is a 'negative' invoice. This is discussed further below.
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Topic 01: Business Documents and Books of Prime Entry

(i) Debit note. A document sent by a customer to a supplier in respect of goods returned or an overpayment
made. It is a formal request for the supplier to issue a credit note.

(j) Remittance advice. A document sent to a supplier with a payment, detailing which invoices are being paid
and which credit notes offset. A remittance advice allows the supplier to update the customer's records to
show which invoices have been paid and which are still outstanding. It also confirms the amount being paid,
so that any discrepancies can be easily identified and investigated.
(k) Receipt. A document confirming confirmation that a payment has been received. This is usually in respect
of cash sales, e.g a till receipt from a cash register. This is discussed further below.

1.2 Invoices
An invoice relates to a sales order or a purchase order.
(a) When a business sells goods or services on credit to a customer, it sends out an invoice. The details on
the invoice should match the details on the sales order. The invoice is a request for the customer to pay what
they owe.
(b) When a business buys goods or services on credit it receives an invoice from the supplier. The details on
the invoice should match the details on the purchase order.

The invoice is primarily a demand for payment, but it is used for other purposes as well, as we shall see.
Most accounting software packages can generate invoices; however, in smaller businesses with paper based
systems, the invoice is often produced on multi-part stationery, or photocopied, or carbon-copied.
The top copy will go to the customer and other copies will be used by various people within the business.

1.2.1 What does an invoice show?

Invoices should be numbered, so that the business can keep track of all the invoices it sends out. Information
usually shown on an invoice includes the following.
(a) Name and address of the seller and the purchaser
(b) Date of the sale
(c) Description of what is being sold
(d) Quantity and unit price of what has been sold (eg 20 pairs of shoes at $25 a pair)
(e) Details of trade discount, if any (eg 10% reduction in cost if buying over 100 pairs of shoes)
(f) Total amount of the invoice including (usually) details any of sales tax
(g) Sometimes, the date by which payment is due, and other terms of sale

1.2.2 Uses of invoices

As stated above, invoices may be used for different purposes.
 Copy to customer as a request for payment
 Copy to accounts department to match to eventual payment
 Copy to warehouse to generate a despatch of goods, as evidenced by a goods despatched note
 Copy matched to sales order and kept in sales department as a record of sales

1.3 The credit note

China Supplies sent out an invoice for 20 dinner plates, but the typist accidentally typed in a total of $162.10,
instead of $62.10. The china shop has been overcharged by $100. What is China Supplies to do?
Alternatively, when the china shop received the plates it found that they had all been broken in the post and
that it was going to send them back. Although the china shop has received an invoice for $62.10, it has no
intention of paying it because the plates were useless. Again, what is China Supplies to do?

The answer is that China Supplies sends out a credit note. A credit note is sometimes printed in red to
distinguish it from an invoice. Otherwise, it will be made out in much the same way as an invoice, but with less
detail and 'Credit Note Number' instead of 'Invoice Number'.

A credit note is a document relating to returned goods or refunds when a customer has been overcharged. It
can be regarded as a negative invoice.
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Topic 01: Business Documents and Books of Prime Entry

1.4 Other documents

The following documents are sometimes used in connection with sales and purchases.

(a) Debit notes

(b) Goods received notes

A debit note might be issued to adjust an invoice already issued. This is also commonly achieved by issuing a
revised invoice after raising a credit or debit note purely for internal purposes (ie to keep the records straight).

More commonly, a debit note is issued to a supplier as a means of formally requesting a credit note.
Goods received notes (GRNs) record a receipt of goods, most commonly in a warehouse. They may be used
in addition to suppliers' advice notes.

Note: Although referred to as 'goods' received notes, GRNs can be used as a record that a service has been
carried out. This is especially the case in electronic purchase order systems where a fundamental step in the
purchase order process is for the accounts department to match a GRN to a purchase order for goods and
services received, before paying a supplier's invoice. This is a key control to ensure that invoices are not paid
if the goods or services have not been received (although there are exceptions to this, as some suppliers may
require payment in advance).

Even where GRNs are not routinely used, the details of a consignment from a supplier which arrives without
an advice note must always be recorded.

GRNs are also key documents in estimating a company's figure for accrued purchases (accruals) that needs
to go into the financial statements. This is because they are evidence of liabilities to pay for goods or services
received, that have not yet been invoiced by the suppliers. The figure goes into the accruals account or
sometimes more specifically a 'GRNI' account (Good Received Not Invoiced) which forms part of the overall
accruals figure. Accruals are discussed in more detail later on.

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Topic 01: Business Documents and Books of Prime Entry

2. The Need for Books of Prime Entry

In the course of business, source documents are created. The details on these source documents need to be
summarised, as otherwise the business might forget to ask for some money, or forget to pay some, or even
accidentally pay something twice. It needs to keep records of source documents – of transactions – so that it
knows what is going on. Such records are made in books of prime entry. Books of prime entry are books
in which we first record transactions.

The main books of prime entry are as follows.

(a) Sales day book

(b) Purchase day book
(c) Sales returns day book
(d) Purchase returns day book
(e) Journal (described in the next chapter)
(f) Cash book
(g) Petty cash book

It is worth bearing in mind that, for convenience, this chapter describes books of prime entry as if they are
actual books written by hand. However, books of prime entry are often not books at all, but rather files stored
on a computer or within accounting software. However, the principles remain the same whether they are
manual or computerised.

Sales and purchase day books

(NOTE: Invoices and credit notes are recorded in day books.)

2.1 The sales day book

The sales day book is the book of prime entry for credit sales.
The sales day book is used to keep a list of all invoices sent out to customers each day. An extract from a
sales day book might look like this.

Most businesses 'analyse' their sales. For example, this business sells boots and shoes. The sale to Smith
was entirely boots, the sale to Alex was entirely shoes, and the other two sales were a mixture of both.
Then the sales day book might look like this.

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Topic 01: Business Documents and Books of Prime Entry

The analysis gives the managers of the business useful information which helps them to decide how best to
run the business.

Most accounting software allows you to raise sales invoices, and automatically generate sales day book
reports of the invoices raised.

2.2 The purchase day book

A business also keeps a record in the purchase day book of all the invoices it receives.
The purchase day book is the book of prime entry for credit purchases.
An extract from a purchase day book might look like this.

The purchase day book records other people's invoices, which have all sorts of different numbers. For ease
of reference, the business may assign its own sequential internal invoice number to each purchase invoice.

Like the sales day book, the purchase day book analyses the invoices which have been sent in. In this
example, three of the invoices related to goods which the business intends to resell (called simply
'purchases') and the other invoice was an electricity bill.

Most accounting software allows you to enter details of the purchase invoices onto the system, and
automatically generate Purchases Day Book reports of the invoices entered.

2.3 The Sales Returns Day Book

When customers return goods for some reason, a credit note is raised. All credit notes are recorded in the
sales returns day book. An extract from the sales returns day book follows.

The sales returns day book is the book of prime entry for credit notes raised.

2.4 The purchase returns day book

Not surprisingly, the purchase returns day book records credit notes received in respect of goods which the
business sends back to its suppliers.
An extract from the purchase returns day book follows.

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Topic 01: Business Documents and Books of Prime Entry

The purchase returns day book is the book of prime entry for credit notes received from suppliers.

Once again, a business with very few purchase returns may record a credit note received as a negative entry
in the purchase day book.

Cash book
The cash book may be a manual record or a computer file. It records all transactions that go through the
bank account.

2.5 The cash book

The cash book is also a day book, used to keep a record of money received and money paid out by the
business. The cash book deals with money paid into and out of the business bank account. This could be
money received on the business premises in notes, coins and cheques, subsequently paid into the bank.
There are also receipts and payments made by bank transfer, standing order, direct debit and bank interest
and charges, directly by the bank.
Some cash, in notes and coins, is usually kept on the business premises in order to make occasional
payments for odd items of expense. This cash is usually accounted for separately in a petty cash book.
One side (the left) of the cash book is used to record receipts of cash, and the other side (the right) is used to
record payments. The best way to see how the cash book works is to follow through an example. For
convenience, we are showing the cash receipts and cash payments sides separately, but they are part of the
same book. Therefore, cash book is the book of prime entry for cash receipts and payments.

Petty cash
Most businesses keep petty cash on the premises, which is topped up from the main bank account. Under
the imprest system, the petty cash is kept at an agreed sum, so that each topping up is equal to the amount
paid out in the period.

What is petty cash?

Most businesses keep a small amount of cash on the premises to make occasional small payments in cash,
e.g staff refreshments, postage stamps, to pay the office cleaner, taxi fares, etc. This is often called the cash

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Topic 01: Business Documents and Books of Prime Entry

float or petty cash account. The cash float can also be the resting place for occasional small receipts, eg
cash paid by a visitor to make a phone call.

2.6 The petty cash book

A petty cash book is a cash book for small payments.

Although the amounts involved are small, petty cash transactions still need to be recorded; otherwise the cash
float could be abused for personal expenses or even stolen.
There are usually more payments than receipts, and petty cash must be 'topped up' from time to time with
cash from the business bank account. A typical layout follows.

2.7 Imprest system

Under what is called the imprest system, the amount of money in petty cash is kept at an agreed sum or 'float' (say, $250).
This is called the imprest amount. Expense items are recorded on vouchers as they occur, so that at any time:
$
Cash still held in petty cash 195
Plus voucher payments (25+5+10+15) 55
Must equal the imprest amount 250

The total float is replenished regularly (to $250, or whatever the imprest amount is) by means of a cash payment from the bank
account into petty cash. The amount of the 'top-up' into petty cash will be the total of the voucher payments since the previous
top-up.

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