Source documents for a trading business (VCE Accounting Unit 3)
“Identifying the source documents used by a trading business to record financial transactions and explaining the role of source documents in providing verifiable evidence for the accounting process”
Source documents are the verifiable evidence that a transaction occurred and are the starting point of recording. The main documents are receipts and EFT records for cash received, EFT records and bank statements for cash paid, sales invoices and purchase invoices for credit trade, statements of account summarising amounts owing, and memos for internal events such as drawings of inventory.
Jump to a section
What this dot point is asking
VCAA wants you to identify the source documents a trading business uses, explain why each transaction needs documentary evidence, and match the correct document to each transaction type. This underpins the qualitative characteristic of verifiability.
The role of source documents
A source document is the original record that provides verifiable evidence that a transaction has occurred, showing the date, the amount, the parties and the nature of the transaction.
Recording begins with a source document because the Conceptual Framework requires information to be verifiable: a knowledgeable observer should be able to check the entry against evidence. Documents also create an audit trail, allow GST to be substantiated for the Australian Taxation Office, and protect against fraud and error.
The main source documents
Receipt: cash received, for example a cash sale or a payment from a debtor. EFT record: electronic funds received or paid. Bank statement: confirms cash items processed by the bank, including interest and bank fees not yet recorded. Sales invoice: a credit sale of inventory to a customer. Purchase invoice: a credit purchase of inventory from a supplier. Statement of account: a periodic summary of amounts owing between the business and a credit customer or supplier. Cheque butt: cash paid by cheque. Memo: an internal transaction with no external party, such as the owner taking inventory.
Each document drives a specific entry. A purchase invoice supports a debit to Inventory and GST Clearing with a credit to Accounts Payable. A receipt for a cash sale supports a debit to Bank and GST Clearing with credits to Sales, plus the cost of sales entry. A memo supports drawings of inventory recorded at cost.
Each document in detail
A receipt is issued when cash is received, for example a cash sale or a payment received from a debtor; the business keeps a copy and issues the original to the payer. An EFT record evidences electronic transfers in or out and is increasingly the dominant cash document as fewer businesses use cheques. A bank statement is produced by the bank and confirms which items have cleared; it also reveals items the business may not yet have recorded, such as interest received, dishonoured cheques and bank charges, which are then journalised.
A sales invoice is the document the business issues for a credit sale of inventory, while a purchase invoice is the document the business receives for a credit purchase. Each invoice typically shows the date, an invoice number, a description and quantity, the price, the GST, the total and the credit terms (for example "3/7, n/30", meaning a 3 percent discount if paid within 7 days, otherwise the full amount within 30 days). A statement of account is a periodic summary of the running balance owed between two parties; it is not itself the evidence for an individual transaction but lets each party reconcile. A cheque butt records cash paid by cheque, and a memo records an internal event with no external party, such as the owner taking inventory (drawings) or the balance day adjustment for depreciation.
How a document drives the entry
Reading a document tells you both the accounts and the direction of the entry. The clue is the type of document and who issued it. A purchase invoice received from a supplier means a credit purchase, so Inventory and GST Clearing increase (debit) and Accounts Payable increases (credit). A receipt issued for a cash sale means cash in and revenue earned, so Bank and GST Clearing increase (debit) and Sales increases (credit), with the matching cost of sales entry recorded from the inventory card. A credit note received from a supplier reverses part of a purchase, reducing Accounts Payable. Practising this read, document then accounts then direction, is exactly what the exam tests when it shows a ledger entry and asks for the source document, or shows a document and asks for the transaction.
Internal versus external documents
External documents involve another party (invoices, receipts issued to customers, bank statements) and are strong evidence because an independent party is involved. Internal documents such as memos are created by the business itself, so they are weaker evidence and are used only where no external party exists, for example recording the owner withdrawing inventory or recording depreciation by memo at balance day. The strength of the evidence matters for the qualitative characteristic of verifiability: an entry backed by an external document can be independently checked, whereas a memo relies on the integrity of the business, which is why memos are reserved for genuinely internal events.
The documents
A business has three documents for 1 July. A purchase invoice from a supplier for inventory of 1,000 dollars plus 100 dollars GST. A receipt issued for a cash sale of 660 dollars including 60 dollars GST, where the inventory sold cost 300 dollars. A memo recording the owner taking inventory costing 150 dollars for personal use.
Purchase invoice entry
Debit Inventory 1,000, Debit GST Clearing 100, Credit Accounts Payable 1,100. The invoice is the verifiable evidence of a credit purchase.
Cash sale receipt entries
Debit Bank 660, Credit Sales 600, Credit GST Clearing 60. Then Debit Cost of Sales 300, Credit Inventory 300. The receipt evidences cash in; the inventory card evidences the cost.
Memo entry
Debit Drawings 150, Credit Inventory 150. No GST and no revenue because the owner is not a customer; the memo is the only evidence because there is no external party.
Check
GST Clearing has a debit of 100 and a credit of 60, a net credit of 40 owing to the ATO. Every entry traces back to a named document.
Why this matters
The exam often shows you a document and asks for the journal entry, or asks which document supports a given entry and why. Knowing the eight documents and the verifiability link lets you both record correctly and justify the recording using the Conceptual Framework.
Because a memo for drawings of inventory looks like a sale leaving the business, students add GST or record it at selling price. There is no GST and no revenue on drawings, because there is no customer and no sale; the inventory is simply removed at cost and charged to Drawings.
Exam-style questions
Questions in the style of VCAA exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
2022 VCAA-style3 marksThe Accounts Payable ledger of BAX for June 2022 shows: 12 June Inventory/GST Clearing $77 000 (credit side); 16 June Bank $68 200 (debit side); 22 June Inventory/GST Clearing $2 200 (debit side). Identify the source document that would be used to verify the entries on 12 June, 16 June and 22 June.Show worked answer →
Read each entry's direction and cross-reference to identify the document (one mark each).
- 12 June (credit, Inventory/GST)
- Accounts Payable increased by a credit purchase of inventory, so the source document is the purchase invoice received from the supplier.
- 16 June (debit, Bank)
- Accounts Payable decreased because cash was paid to the supplier, so the source document is the EFT (electronic funds transfer) record (a cheque butt or bank statement is also acceptable).
- 22 June (debit, Inventory/GST)
- Accounts Payable decreased through a return of inventory to the supplier, so the source document is the credit note received from the supplier.
Practice2 marksKitchen Central received a tax invoice from Wood n Set, Invoice W58 dated 24/04/2020, for 8 handcarved plate sets at $500 each (subtotal $4 000), GST $400, total $4 400, terms 3/7, n/30. Describe the transaction that led to this document.Show worked answer →
A tax invoice received by the buyer evidences a credit purchase of inventory.
Kitchen Central purchased 8 handcarved plate sets on credit from Wood n Set for $4 000 (plus $400 GST), a total of $4 400 owing.
The terms 3/7, n/30 mean a 3% settlement discount is available if paid within 7 days, otherwise the full amount is due within 30 days. Because it is an invoice (not a receipt), no cash has yet changed hands, so the amount is recorded as an increase in Inventory and GST Clearing and an increase in Accounts Payable. Marks: identify it as a credit purchase of inventory and state the amount or that it is unpaid (on credit).