Book-keeping · Lesson 2

Source documents, discounts and VAT; day books and the journal proper

WAECNECO

What the syllabus asks

WAEC: (1) source documents: meaning, types, uses and contents; (2) books of original entry: meaning, types, format, uses and differences; preparation of journals (sales, purchases, returns inwards, returns outwards and general journals). Extends fa2.

NECO: (1) source documents: meaning, types, uses and contents; (2) books of original entry: meaning, types, format, uses and differences; preparation of journals (sales, purchases, returns inwards, returns outwards and general journals). Extends fa2.

What you will learn

Explain the meaning, uses and contents of source documents.
Identify the main source documents and the book each feeds.
Distinguish trade discount, cash discount and VAT.
State the uses of books of original entry and their differences.
Prepare the sales, purchases, returns inwards and returns outwards books.
Prepare analytical day books and cross-cast them.
Prepare journal entries, including the opening entry, with narrations.
Explain internal control over documents.

Key points

Source documents are the evidence for every entry.
Enquiry, quotation, order, advice and delivery notes come before the invoice.
Invoice and credit note are the key day-book documents.
Trade discount is not recorded; cash discount is.
Seven books: sales, purchases, returns in, returns out, cash, petty cash, journal.
Day books: credit trade goods only; totals posted monthly.
Personal accounts get individual entries; nominal accounts get totals.
Returns are at net invoice value.
Analytical day books split totals by department.
The journal needs debit first, credit indented and a narration.

Start here: Source documents: meaning, purposes and contents

A source document is the original written (or electronic) evidence that a transaction has taken place. It is the starting point of all book-keeping: no entry should be made without one. If the auditor of a Kaduna school asks, “Why did you pay ₦85,000 to Musa Plumbing?”, the bursar must be able to produce the invoice and the receipt.

Purposes (uses) of source documents

Evidence that a transaction occurred, for the owner, auditors, tax officers and courts.
Information for entries: date, names, quantities, prices and amounts are copied from them.
Control: serially numbered documents show if any are missing; authorised signatures prevent unauthorised spending.
Checking: a delivery note can be compared with the invoice before payment.
Settling disputes: a signed delivery note proves the customer received the goods.

General contents

Most source documents carry: name and address of the issuer; a serial number; the date; the name of the other party; a description of goods or services with quantities and prices; totals, discounts and tax; terms of payment; and a signature or stamp.

E. & O. E. (“errors and omissions excepted”) printed on an invoice reserves the seller’s right to correct mistakes later. RC number is the Corporate Affairs Commission registration number of a company.

Electronic source documents

A POS slip, a bank alert, a transfer receipt from a mobile banking app and an e-invoice are all valid source documents if they can be printed or saved. A wise trader saves screenshots of transfer receipts in a dated folder, because an SMS alert alone can be deleted or faked.

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Practice questions

1. A document sent by a seller to a buyer showing goods sold on credit and the amount due is

an invoice
a receipt
a credit note
a debit note

Show answer

A: an invoice
Invoice.

2. A credit note is sent by the seller when

goods are first sold
cash is received
an order is placed
the buyer returns goods or was overcharged

Show answer

D: the buyer returns goods or was overcharged
Reduces the buyer’s debt.

3. 50 cartons at ₦18,000 less 10% trade discount. The net value is

₦90,000
₦870,750
₦810,000
₦900,000

Show answer

C: ₦810,000
900,000 − 90,000.

4. VAT at 7.5% on a net invoice value of ₦810,000 is

₦6,075
₦60,750
₦67,500
₦81,000

Show answer

B: ₦60,750
0.075 × 810,000.

5. Trade discount is

not recorded in the ledger
debited to discount allowed
credited to discount received
entered in the cash book

Show answer

A: not recorded in the ledger
Only the net amount is recorded.

Key words

Source document: Original evidence of a transaction.
Invoice: Seller’s demand for payment for goods supplied on credit.
Credit note: Seller’s document reducing the buyer’s debt.
Debit note: Buyer’s claim for a reduction, or seller’s extra charge.
Statement of account: Periodic summary of a customer’s account.
Trade discount: Reduction from list price for traders; not recorded.
Cash discount: Allowance for prompt payment; recorded.
Book of original entry: Book where transactions are first recorded.
Day book: Book listing one kind of credit transaction.
Journal proper: Book for transactions not in other books.
Narration: Brief explanation under a journal entry.
Folio: Page reference linking books and accounts.

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