1. Accounting & Financial Analysis 111 Lecture 8 Source Documents, Day accounts/Specialised Journals, Debtors & Creditors Subsidiary Ledgers

2. 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.

3. 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.

4. 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.

5. 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

6. 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.

7. 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

8. 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

9. 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

10. 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)

11. 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.

12. 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

13. 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

14. 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.

15. 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).

16. 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

17. 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.

18. 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).

19. 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.

20. 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.

21. 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.

22. 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

23. 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.

24. 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.

25. 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

26. 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

27. 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)

28. 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).

29. 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.

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

31. 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.

32. 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

33. Debtors Ledger Trade debtors originate from the Sales Journal Every sale made on credit will either create a new debtor or increase the amount owing by an existing debtor Previously, we said that the monthly total of the sales journal is posted to the General Ledger. Trade debtors originate from the Sales Journal Every sale made on credit will either create a new debtor or increase the amount owing by an existing debtor Previously, we said that the monthly total of the sales journal is posted to the General Ledger.

34. Monthly total of the sales journal The entry would be: CR Sales a/c (Nominal ledger) $68,700 CR GST payable a/c $6,870 (Proprietary ledger) DR Accounts receivable (Trade Debtors, Debtors control a/c) (Proprietary ledger) $75,570 Being credit sales for the month of …….. Being credit sales for the month of …….. The entry would be: CR Sales a/c (Nominal ledger) $68,700 CR GST payable a/c $6,870 (Proprietary ledger) DR Accounts receivable (Trade Debtors, Debtors control a/c) (Proprietary ledger) $75,570 Being credit sales for the month of …….. Being credit sales for the month of ……..

35. Amount posted to the Accounts Receivable will be:  The total of all the Credit Sales made during the month to all of the customers.  The total of the Sales Returns for the month by all of the customers.  The total of Cash Received from Debtor payments.  The total of all the Credit Sales made during the month to all of the customers.  The total of the Sales Returns for the month by all of the customers.  The total of Cash Received from Debtor payments.

36. Why use subsidiary ledgers? The general ledger will only show a total figure of how much is owed to the business it will not give details as to WHO owes the money nor HOW MUCH each customer owes. This information is most important to a business as it needs to collect money owing as quickly as possible. Debtors Subsidiary Ledger In order to have this information available there needs to be a Debtors Subsidiary Ledger for amounts owing to the business and Creditors Subsidiary Ledger a Creditors Subsidiary Ledger for amounts owing to the customers. The general ledger will only show a total figure of how much is owed to the business it will not give details as to WHO owes the money nor HOW MUCH each customer owes. This information is most important to a business as it needs to collect money owing as quickly as possible. Debtors Subsidiary Ledger In order to have this information available there needs to be a Debtors Subsidiary Ledger for amounts owing to the business and Creditors Subsidiary Ledger a Creditors Subsidiary Ledger for amounts owing to the customers.

37. Controlling Debtors A business needs to monitor debtor payments using some of the following techniques: Get a credit check by using a reputable credit agency Get 3 references on the customer from their current suppliers Clearly indicating the credit terms being offered Enforcing credit terms as agreed Ensure that all invoices and statements are accurate and delivered promptly. Stop service to any delinquent payer Offer discount for early settlement Review debtors regularly to confirm that the credit terms are being observed. A business needs to monitor debtor payments using some of the following techniques: Get a credit check by using a reputable credit agency Get 3 references on the customer from their current suppliers Clearly indicating the credit terms being offered Enforcing credit terms as agreed Ensure that all invoices and statements are accurate and delivered promptly. Stop service to any delinquent payer Offer discount for early settlement Review debtors regularly to confirm that the credit terms are being observed.

38. Outstanding accounts Check that the invoice sent to the customer was correct and that the customer received the goods. (delivery note signed by customer) Contact the customer by telephone followed by a letter demanding payment. If payment is still not received contact your debt collecting agency or lawyer to follow up. Check that the invoice sent to the customer was correct and that the customer received the goods. (delivery note signed by customer) Contact the customer by telephone followed by a letter demanding payment. If payment is still not received contact your debt collecting agency or lawyer to follow up.

39. DEBTORS SUBSIDIARY LEDGER The debtors subsidiary ledger will have an account opened for each individual debtor Each credit sales invoice (after being entered into the SALES JOURNAL) will also be entered into the appropriate debtors account in the subsidiary ledger as will other journal transactions that effect the Accounts Receivables. The debtors subsidiary ledger will have an account opened for each individual debtor Each credit sales invoice (after being entered into the SALES JOURNAL) will also be entered into the appropriate debtors account in the subsidiary ledger as will other journal transactions that effect the Accounts Receivables.

40. DEBTORS SUBSIDIARY LEDGER (2) The journals that have a direct influence on Accounts Receivable (Debtors) are: The Sales journal The Sales returns journal The Cash receipts journal The journals that have a direct influence on Accounts Receivable (Debtors) are: The Sales journal The Sales returns journal The Cash receipts journal

41. PRACTICE ACTIVITY! Class Exercise 8A & 8B Do it manually or use Excel Class Exercise 8A & 8B Do it manually or use Excel