POA Notes – Source Documents
One of the areas in POA syllabus that students find it more challenging to understand and remember is the topic on source documents. Source documents are legal documents which reflect the underlying business transactions. The reason why students may find source documents is not that easy to understand could be due to the lack of real-life accounting work experience. In this article, Mr. Wong will attempt to explain in simple terms how each of the commonly encountered source documents in ‘O’ and ‘N’ Level POA examinations work. Whenever possible, real-life usage of the source documents will also be provided. Please note that this POA note is not a substitute for comprehensive verbal explanation in POA tuition class.
Invoice
One of the most popular source documents which is used in real business world and one which is commonly examined in ‘O’ and ‘N’ Level POA examinations is invoice. First of all, it is important you are aware that they are 2 types of sales invoices. In the real world, we call them sales invoice and purchase invoice.
Sales invoice is an invoice which the company issues to its customer when customer buys goods on credit. The sales invoice is issued by the company to its customer, providing the details of the sale of goods transaction such as the amount, credit term and description of the goods. Please note that this must be a credit transaction, i.e. no cash has been given by customer to the company. If it is a cash sale of goods, a different source document will be issued to customer which we will elaborate later.
Purchase invoice is an invoice which the company received from its supplier when the company buys goods on credit. The purchase invoice is issued by the supplier to the company, providing the details of the purchase of goods transaction, such as the amount, credit term and description of the goods. Again, it is important to remember this is only for credit transaction and not cash transaction.
Debit Note
Do remember that there are also two types of debit notes. Firstly, debit notes can be issue by the company to its customer. Secondly, debit notes can also be issue by the supplier to you (the company.
Debit note works just like invoice, except debit note is issued for the amount undercharged. For example, you sell goods worth $100. However, you have only issued invoice for $90. For the remaining $10, you have to issue debit note. Please note that debit note is used in quite a different manner in the real world. Mr. Wong will not elaborate on the details so as to keep things simple.
It works on the supplier side as well, if the supplier has issued invoice to you which is less than the amount it should be, the supplier will have to issue a debit note to you (the company) for the amount undercharged.
Credit Note
The third source document that you will need to know is credit note. Just like invoice and debit note, there 2 types of credit notes. One of them is a credit note the company issues to customer and another is the credit the supplier issues to the company. Did you notice? There are always these 3 main players in the business, i.e. the company (YOU), the customer and the supplier. Please remember that you are always the company and do not think that you are the customer or supplier!
When the goods you sold on credit to the customer are damaged, the customer may not be happy and therefore they will return those goods back to you. When you receive the goods back, you will need to issue a credit note to your customer to acknowledge the return of damaged goods. Please note again that the goods must have been sold on credit and not for cash.
On the other hand, you (the company) can also return damaged goods which you have purchased from your supplier on credit. When you return the goods, the supplier needs to issue you a credit note to acknowledge the return of goods by you to the supplier.
Receipt
The fourth source document we shall look at is receipt. Again, receipt can go in 2 directions. It can be issued from the company to the customer and the supplier can also issue a receipt to you (the company).
Understanding receipt is quite easy. Think of Popular Bookshop! When Popular Bookshop sell books to its customer, the customer pays Popular Bookshop in cash. After receiving the cash (ching, ching!), the cashier will issue the customer a receipt. Receipt is for the sale of goods transaction, just like invoice. The different is that invoice will be issued to customer who buy on credit (never pay cash) and receipt will be issued to customer who buy on cash (pay cash).
Just like invoice, debit note and credit note, receipt can also be issued by the supplier to you (the company). If Popular Bookshop buys its books on cash from its supplier (such as book publishers), the supplier will have to issue receipt to Popular Bookshop upon receiving the cash from Popular Bookshop.
Bank Statement
The last popular source document which we will look at is bank statement. Unlike the first four source documents that can go both ways, bank statement can only be issued by the bank to the company. Obviously, you (the company) cannot issue a bank statement because the company is not a bank.
Under your POA syllabus, you will only receive the bank statement after the month ends. There are certain transactions that you will not know until you have received the bank statement, such as interest received by the company (for keeping the money with the bank) and bank charges. Bank statement is therefore the source document used to record those transactions.
Conclusion
The topic on source documents is regularly examined in POA examinations. It is examined as recent as 2018 POA examination. If you have bought your ten-year series, you may look at P1, Question 1, Part (c) under ‘N’ Level syllabus. It carries as many as 4 marks. As POA is an easy subject, it is crucial that you do not lose too many marks, otherwise getting A1 may be a little challenging.
Should you have further doubts on source documents, do feel free to drop Mr. Wong an e-mail or reach out via Mr. Wong POA Tuition’s Facebook Page.
Written by Mr. Wong – Principal POA Tutor of Mr. Wong POA Tuition