Unit one: Checking and verifying supporting documentation

This learning guide is developed to provide you the necessary information regarding the following
content coverage and topics:

 Supporting documents in accounting transaction

 Checking and recording source documents
 Examining and verifying supporting documents
This guide will also assist you to attain the learning outcomes stated in the cover page.
Specifically, upon completion of this learning guide, you will be able to:

 Support documents in accounting transaction

 Identify, check and record Information from documents.
Examine Supporting documentation

1.1. Supporting documents in accounting transaction

1.1.1. Source Document

Every time a business is involved in a financial transaction, a paper trail is generated. This paper
trail is referred to in accounting as source documents. Whether checks are written to be paid out,
sales are made to generate receipts, billing invoices are sent by suppliers, or work hours are
recorded on an employee’s timesheet – all the respective documents are source documents.

The most common documents are:

1. Sales and Purchase Invoices
When an item is sold the seller will issue a document providing all the details of the sale.
If the seller does not expect cash up front before sending the item, they will state on their invoice
their payment terms i.e. the length of time the buyer has until it’s time to pay.
One example is for payment to be received no later than 30th of the month following the date of
invoice. The seller enters the document into their system as a sales invoice. The buyer will enter it
into their system as a purchase invoice.
2. Credit and Debit Notes

If the buyer decides not to keep an item but return it to the seller, the seller will issue a special note

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 to show the amount to be refunded. In the supplier’s bookkeeping system this is called a credit
note because it reduces the amount owed by the customer. In the customer’s bookkeeping system it
is called a debit note because it reduces how much they owe to the seller.
3. Payment/Remittance Advices
When a customer pays their bill they will send the supplier a remittance advice which details the
amount and the invoice numbers being paid. It will be posted either with the check or by itself if
payment is made by internet banking. Remittances can often be found already printed as a small
cut out section at the bottom of, or down the right hand side of, the sales/purchase invoice.
4. Checks (Cheques)
A check (cheque) is a special bank note that represents the cash that is being paid by the customer.
The check requires the signature of the person who is an authorized signatory of the bank account
from which the check is issued. Each check has a special number on it which should be recorded
into the bookkeeping system. The name of the payee should be written on the check. If it is left
blank anyone can fill it in with their own name and deposit the check, thus stealing the money.
Checks should be crossed across the top with the words ‘not negotiable’, and the printed words ‘or
bearer’ crossed off (not all checks have this) so that the check has to be deposited into the payee’s
bank account and not cashed, thus avoiding theft.
5. Receipts
Once the customer has paid their bill, the supplier can issue a receipt. A receipt is proof that the
payment has been made, which is a good idea when paying cash. Receipts are usually
automatically provided when buying something from a shop.
6. Deposit Slip
When a customer pays by cheque or cash, the seller will write a bank deposit slip which will be
taken to the bank and presented together with the cheques and cash. The deposit slip will show
the total amount being deposited plus a break-down of the cheque amounts and cash.
The bank will make a record of the payment so that it shows up on the payor’s bank statement as
a payment received, and on the customer’s bank statement as a payment made.
7. Other
Accounting source documents may include loan or lease agreements with attached payment
summaries that show the total amount due plus interest and administration fees.

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 Importance of Source Documents

The source document is essential to the bookkeeping and accounting process as it provides
evidence that a financial transaction has occurred. During an accounting or tax audit, source
documents back up the accounting journals and general ledger as acceptable transaction trail.

You would keep source documents for your business just like you keep receipts for tax-deductible
items for your taxes. If your taxes are audited, the source documents provide the proof that you've
made those purchases. The same holds for your business, but in business, you keep original
documents for every financial transaction, not just charitable donations.

Document Storage

Any information generated through source documents should be properly recorded in company’s
journal, accounting software, or financial books. After the initial recording, all documents should
be preserved and organized into a file and put into a system so they can be retrieved at any time. It
is also important to make a record of general internal control procedures specifying who in the
firm can access and authorize payments, orders, and other transactions.

Originality of Source Documents

In the majority of cases, photocopies of source documents are legally permissible. According to
the US Internal Review Service (IRS) as long as these photocopies are complete, legible, and
accurate representations of the original document, they are legally acceptable.

Similarly, the Canadian Revenue Agency (CRA) accepts scanned documents as long as the records
are produced and retained in paper format or stored in an electronically accessible and readable
format. Although organizing and filing these documents can be tedious, putting in the extra time to
properly maintain a paper trail and create an easy way to access these documents can result in huge
time savings in the future, and also ensures greater transparency.

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 1.2. Checking and recording source documents
You have to check whether all necessary information are included in the source document or not
before recording the information to the accounting book. If you are unable to get the necessary
information ask or report to concerned body.
Identifying and checking Information from source document

Information from document

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  account numbers
 addresses
 amounts of money, figures
 card numbers
 cheque numbers
 dates& Names
 TIN number

Recording information from source document

In this computer age, some of this information now is incorporated into a computer database that
we enter data directly into, and the database makes all the associations we need automatically,
storing everything in one central, categorized area. Even though electronic processes have
eliminated a lot of physical paper trails that get lost in misfiling, the concepts driving these
computerized accounting systems are all rooted in the accounting structure.

In general, everything starts from a source document and then moves to a journal. In the
accounting world, the journal is a book that contains original entries for financial transactions.
Journals store financial transaction information ultimately derived from source documents. Later,
these journal entries are summed up and then posted, or transferred, to a ledger. A journal
records all entries chronologically, though in a computerized accounting system you would be
able to sort by any parameter.

1.3 Examining and verifying of supporting documents

1.3.1 Completeness of supporting document

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 Completeness refers to the comprehensiveness or wholeness of the document. There should be
no gaps or missing information from the document to be truly complete. Sometimes incomplete
document is unusable, but often it’s still used even with missing information, which can lead to
costly mistakes and false conclusions.
Incomplete document is often a result of unsuccessfully collected data. For example, say a name
and email address was supposed to be gathered, but there is no associated email address when
the information is imported into your systems. This can happen if your business is gathering
information from a survey or gating content in an attempt to get prospect contact information.
Consumer data isn’t complete unless all the available data is successfully gathered and stored
properly.
Parameters and relevant test of source document
Occurrence – this means that the transactions recorded or disclosed actually happened and
relate to the entity. For example, that a recorded sale represents goods which were ordered by
valid customers and were dispatched and invoiced in the period. An alternative way of putting
this is that sales are genuine and are not overstated.
Completeness – this means that transactions that should have been recorded and disclosed
have not been omitted.
Relevant test – select a sample of customer orders and check to dispatch notes and sales
invoices and the posting to the sales account in the general ledger.
Note the difference in the direction of the above test. In order to test completeness, the procedure
should start from the underlying documents and check to the entries in the relevant ledger to
ensure none have been missed. To test for occurrence the procedures will go the other way and
start with the entry in the ledger and check back to the supporting documentation to ensure the
transaction actually happened.
Accuracy – this means that there have been no errors while preparing documents or in posting
transactions to ledgers. The reference to disclosures being appropriately measured and
described means that the figures and explanations are not misstated.

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