Week three
Introduction
When a business transaction occurs, it is first recorded in a voucher or a document which may be
in duplicate or triplicate. The original voucher or document is given out to the customer and the
remaining copies are retained by the organization for filling. These documents in which the
transactions are evidenced are referred to as source documents.
Expected learning outcomes
At the end of the lesson the learners should be able to
1. Explain the nature and purpose of source documents in a business
2. Identify and explain the various source documents
3. Identify and explain the various books of original entry
4. Prepare books of original entry
5. Post the totals in the books of original entry to the ledger
Source documents and books of original entry
Definition of source documents
Source documents or underlying documents are documents which contain information to be
recorded in the books accounts. They must always be present to support whatever records or
transactions have been made.
Types of source documents
The following source documents are used by most businesses
1. Sales invoice
This document shows the quantity of goods sold the selling prices, a brief description of the
goods sold and the other terms of sale. It is issued by the seller of goods on credit and delivered
to the purchaser to evidence credit sales.
2. Purchases invoice
This document shows the description, quantity, and the terms of purchase. The document is
received from suppliers of goods on credit as evidence of credit purchases.
3. Credit note
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This is a document made by the seller of goods and sent to the buyer to correct an overcharge in
an invoice amount. It can also be issued where there are returns of goods by customers or by the
suppliers
4. Debit note
This document is sent by the seller, to the purchaser to correct an undercharge in an invoice
amount. It therefore increases the invoice amount.
5. Cash sale receipts
A cash sale receipt is made by the seller to the purchaser to evidence cash sales made. The
document gives a brief description of the goods purchased, prices and the amount received net of
discounts if any.
6. Local Purchase Order (LPO)
This is the basic document starting off the chain of events for provisioning the business
organization with raw materials or finished goods requirements
7. Advice Note
This document is sent by the supplier to the buyer to advice receipt of order, and it indicates the
time and conditions for fulfillment
8. Delivery Note
This is a document prepaid by the seller to accompany the delivery of the goods to the buyer. It
provides proof of the physical transfer of goods to the buyer.
9. Goods Received Note
This is the initial important merchandise record made to evidence the details of goods received,
inspected, approved and placed in stock.
10. Statement of account
This is an account in statement form which is periodically rendered by one party showing the
amounts due.
11. Bank pay-in –slip Sheets
This is a document which is used to record the deposit of money (cash, cheque etc)
12. Authority to incur expenditure
This is a document that empowers one in authority to incur expenditure up to a specified limit.
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13. Cheque
This is a written order from a bank current account holder, addressed to his\her bank to pay a
stated sum of money to the order of the person named on the order or to its bearer.
14. Minutes and resolutions
This is a document that gives evidence of minutes relating to a financial transaction following a
given meeting held.
Books of original entry
These books are also known as subsidiary books or books of prime entry. A book of original
entry is a book of record in which transactions are recorded as they occur on a daily basis and in
a chronological order, before they are posted to the relevant accounts in the ledger.
Uses of books of original entry
1. They eliminate unnecessary details from the ledger as only totals of the transactions are
posted to the ledger accounts
2. They contain some details which may become useful for reference and cross-
checking such as quantities and units of prices.
3. They facilitate implementation of the double entry system as the risk of omission of one
or both aspects of the entries is greatly reduced.
4. It is possible to have more information given in a subsidiary book than in the ledger.
5. They minimize errors in recording transactions from source documents.
Disadvantages
1. Results in duplication of works
2. May result in wastage of time
3. Involve extra clerical labour and cost in terms of additional stationery for the journal
Types of books of original entry
Books of original entry
These are books in which accounting transactions are recorded from the source documents. The
totals in these books are then transferred to the ledger. These books are generally referred to as
day books, journals or books of prime entry.
These books includes
1. Sales day book
2. Purchases day book
3. Sales return day book
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4. Purchases return day book
5. Journal proper
6. Cash book
1. Sales day book/Sales Journal
This is a book of original entry that is used to record credit sales only. It drawn from the
outgoing invoices sent to credit customers (debtors or trade receivables). It shows the date,
particulars and the amount of the transactions. The format is given below
Date Particulars Invoice No. Folio/Reference Amount
2. Purchases day book
This is a book of prime entry that records credit purchases only. It contains details of transactions
with creditors and it is drawn from incoming invoices. The format is the same as that of the sales
day book
3. Sales returns or return inwards day book
This book of original entry records all the returned credit sales. Returns may be due to
oversupply, goods damaged on transit to the customer or the goods supplied are not of the
quality that the customer ordered. It is prepared from the information obtained from the credit
notes sent to the customers. The format is as follows
Date Particulars Credit note. Folio/Reference Amount
No.
4. Purchases returns or return outwards day book
This is a book of original entry that is used to record particulars of all goods returned to the
suppliers which were purchased on credit. It is prepared from the incoming credit or debit notes.
Goods may be returned to the suppliers for the same reasons as given in the sales return above.
The format is the same as for the sales return daybook.
5. Cash book
This is a book of original entry that is used to record cash and bank receipts and payments. It
combines cash and bank accounts in one sheet. The various types of cash books includes, one
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column cash book, two column cash book , three column cash book and petty cash book. This
will be discussed in details later
6. Journal Proper or general journal
This is used to record all other transactions that do not fall in the above books. It indicates the
account to be debited and that one to be credited.
Uses of general journal
The general journal serves many useful purposes such as the recording of:
1. Opening balances at the beginning of a financial period
2. Purchases or sale on credit of non-trading items like non-current assets
3. Correction of errors made during the recording of transactions , balancing and closing
accounts in the ledger
4. Transfer of amounts from one account to another in the ledger
5. Closing accounts of a business at the end of its financial period
6. Adjustment at the close of the period(e.g. depreciation ,bad
debts) The format appears as follows
Particulars Dr. Cr.
Example 1:
Mr.Kamoing started a sole trader business on 1st January 2016. The following information is
provided
January 1st: Deposited sh. 200,000 in his business bank account
January 3rd: Bought Office furniture worth sh.45,000 and paid by cheque
January 5th: Withdrew sh.50,000 from the bank to be used by the business
January 10th: Paid electricity bill in cash sh. 4,500
January 13th: Purchased goods for resale worth Sh.30,000 on credit from Mr. Kirui
January 15th: Purchased goods for resale worth sh. 40,000 and paid by cheque
January 16th Sold goods for cash worth sh.25,000
January 20th: Sold goods on credit to Mr. Kanini worth sh.60,000
January 22nd : Withdrew Sh.40,000 from the bank for his personal use
January 25th: obtained a bank loan from equity bank worth sh.150,000
Required: Prepare journal entries to record the above transactions
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Example 2:
The following transactions relate to X sole proprietorship for the month of April 2010
2010
April 1: cash in hand (Dr) Sh 40,000 Cash at bank
(Dr) Shs 120,000
“ 4: good sold Sh 132,000
“ 7: received a cheque from Ruth and immediately deposited in bank sh64, 000
“ 10: paid Julius by cheque Sh 50,000 after discounting Sh 500
“ 15: cash purchases Sh 80,000 after a discount of Sh 600
“ 17: cash deposited in bank Sh 100,000
“ 20: sales paid in by open cheque Sh 150,000 after discount amounting to Sh 1,000
“ 22: withdrew from bank for office Shs 75,000
“ 28: purchased a computer by cheque Sh 10,000
“ 30: Deposited into bank Shs 120,000
Required
Journal entries in the books of X sole proprietorship
Review Questions
1. What is a source document (2marks)
2. Identify and explain six types of source documents (12marks)
3. Define the term books of original entry (2marks)
4. Describe any five books of original entry (10 marks)
5. Examine five uses of books of original entry (5marks)
6. Outline five uses of the general journal (5marks)
7. Explain the uses of the following source documents
i) Sale invoice (2marks)
ii) Debit note (2marks)
iii) Cash sale (2marks)
iv) Delivery note (2marks)
v) Credit note (2marks)
Conclusion
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As the learners are now well acquainted with the source documents and books of original
entry, they should be able to identify and explain them as well as posting transaction from
the books of original entry into the ledger.
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