Financial Accounting · Lesson 2

Source documents and subsidiary books

JAMBWAECNECO

What the syllabus asks

JAMB: Topic 2 Principles of double entry (a) functions of source documents, (b) books of original entry; Topic 4 discounts (trade vs cash)

WAEC: Accounting equation and double entry principles: purpose and functions of source documents; subsidiary books

NECO: Accounting equation and double entry principles: purpose and functions of source documents; subsidiary books

What you will learn

State the purpose and functions of source documents.
Identify the main source documents and the book in which each is recorded.
Distinguish trade discount from cash discount.
Write up sales, purchases, returns inwards and returns outwards day books.
Prepare journal entries with narrations, including opening entries.
Explain how books of original entry are posted to the ledger.
State the advantages of using books of original entry.

Key points

Source documents give evidence, audit trail and control.
Invoice → sales/purchases day book; credit note → returns inwards; debit note → returns outwards; receipts/cheques → cash book; vouchers → petty cash book.
Trade discount: off list price, not in ledger. Cash discount: for prompt payment, recorded as discount allowed/received.
Day books record credit transactions in goods only.
Journal: opening entries, non-current assets on credit, corrections, transfers, adjustments, bad debts, drawings of goods.
Sales day book: Dr customers, Cr sales total. Purchases day book: Dr purchases total, Cr suppliers.
Returns are valued at net invoice price.
Ledger divisions: sales ledger, purchases ledger, general ledger, cash book.
VAT in Nigeria is 7.5% (Nigeria Tax Act 2025); usually ignored in exam questions unless given.

Start here: Purpose and functions of source documents

Every entry in a set of accounts must be supported by evidence. That evidence is the source document: an invoice, a receipt, a credit note, a cheque counterfoil, a POS slip or a bank alert. Kemi runs Kemi Fabrics, a wholesale fabric business at Balogun Market, Lagos. When she sells twenty bundles of ankara on credit to Okafor Stores, she issues an invoice. That invoice is the first link in the chain that ends in her annual accounts.

Functions of source documents

Evidence: they prove a transaction occurred and show its amount, date and parties.
Basis of recording: entries in books of original entry are made from them.
Audit trail: auditors trace figures in the accounts back to documents.
Control: serially numbered documents reduce fraud; missing numbers reveal problems.
Settling disputes: with customers, suppliers or tax authorities.
Legal and tax requirements: the tax authority (Nigeria Revenue Service, formerly FIRS) and state revenue services require records to support returns.

Qualities of a good source document

It should be serially numbered, dated, show the names and addresses of both parties, describe goods or services, show quantities, prices and totals, and be signed or authorised. Electronic documents (e-invoices, bank alerts, POS printouts) are acceptable if they are complete and retrievable.

Worked example 2.1

State two problems that may arise if a business does not keep source documents.

Solution: (i) Transactions may be omitted or recorded wrongly with no way to check, so profit is misstated. (ii) Staff can steal cash or goods without detection, and the business cannot prove expenses to the tax authority.

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Practice questions

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

Invoice
Receipt
Credit note
Debit note

Show answer

A: Invoice
The invoice is the source document for credit sales.

2. Which document gives evidence that cash has been received?

Invoice
Delivery note
Order form
Receipt

Show answer

D: Receipt
A receipt acknowledges payment.

3. A debit note is sent by a buyer to a seller to

confirm payment
show the balance owed
request a reduction for goods returned or overcharged
order goods

Show answer

C: request a reduction for goods returned or overcharged
The seller replies with a credit note.

4. A statement of account sent by a supplier shows

the buyer’s bank balance
the transactions and balance owed for the period
only cash sales
the supplier’s profit

Show answer

B: the transactions and balance owed for the period
It summarises invoices, returns and payments.

5. Credit purchases of goods for resale are first recorded in the

purchases day book
sales day book
cash book
journal proper

Show answer

A: purchases day book
Goods for resale on credit go to the purchases day book.

Key words

Source document: Original record that provides evidence of a transaction.
Invoice: A document sent by a seller to a buyer on a credit sale, showing goods, prices, discounts and amount due.
Credit note: A document sent by a seller to a buyer reducing the amount owed, e.g. for returned or overcharged goods.
Debit note: A document sent by a buyer to a seller claiming a reduction (e.g. for goods returned); also used by a seller to correct an undercharge.
Receipt: A written acknowledgement that money has been received.
Statement of account: A summary sent by a seller to a customer showing transactions for a period and the balance owing.
Pay-in slip (deposit slip): A bank form used to pay cash or cheques into an account.
Cheque: A written order by an account holder to a bank to pay a stated sum to a named person or bearer.
Book of original entry: A book in which transactions are first recorded before posting to the ledger.
Day book (journal): A book of original entry for credit transactions of one type, e.g. sales day book.
Journal proper: The general journal used for transactions not recorded in other books of prime entry.
Narration: A short explanation written under a journal entry.

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