RECORDING TRANSACTIONS

SOURCE DOCUMENTS

The details of financial transactions are usually described on various documents received by or produced within an accounting system. These documents provide input into the system. The purchase of supplies or materials will produce a purchase order (if used), an invoice and/or statement and a voucher. Each of these documents provides input into various stages of the system either as a control device or authorization of the transaction.

Some of source documents include;

1. Quotations

2. Purchase orders

3. Statement of account

4. Remittance advice

5. Receipts

6. Petty cash vouchers

7. Sales invoice

8. Purchase invoice

9. Credit notes

10. Debit notes

11. Bank statements

1. QUOTATIONS

A quotation is used to let a potential customer know the cost of goods or services before they decide to purchase them. When a 'seller sends a quotation, it commits them to a certain price. This is why quotations are mostly used when costs are relatively stable and the services/goods to be provided can be accurately estimated (labor, cost of raw materials, etc.).

What to include in a quotation

There are a number of items that should be included and considered when preparing a quotation for a customer.

First of all .a quotation should. include the price that you have decided to charge for the service or goods you Will provide, In a quotation; you can include a breakdown of the components leading to the settled price (such as labor costs, raw material costs, VAT etc.) You may also want to specify a time schedule: i.e. how long the project will take you or how long it will _be until goods are delivered, A quotation may also indicate a specific time period for which it is valid, e.g. 30 days. Also, a project or service quotation may include an explanation of how any requests for modifications or changes will affect the price once the project is-underway

2. PURCHASE ORDERS

A purchase order (PO) is a commercial document issued by a buyer to .a seller, indicating types, quantities and agreed prices for products or services the seller will provide to the buyer. Sending a Purchase order to a supplier constitutes a legal offer to buy products or services. Acceptance of a purchase order by a seller usually forms a contract between the buyer and seller, so no contract exists until the purchase order is accepted.-It is used to control the purchasing of products and services from external suppliers.

Companies use purchase orders for several reasons:

-Purchase orders allow-buyers to clearly and explicitly communicate their intentions to sellers

-Sellers are protected in case of a buyer's refusal to pay for goods or services

-Purchase orders help a purchasing, agent to manage incoming orders and pending orders

-Purchase orders provide economies in that they streamline the purchasing process to a standard procedure

-Commercial lenders or financial institutions may provide financial assistance on the basis of purchase orders.

Electronic Purchase Orders

Many purchase orders are no longer paper-based, but rather transmitted electronically over the Internet. It is common for electronic purchase orders to be used to buy goods or services online for services or physical goods of any type.

3. STATEMENT OF ACCOUNT

Also known as an account-statement, a statement of account is a record of the transactions that have occurred on a customer's account during a specified period of time. The line items on the account will record information about purchases made by the customer, -any payments rendered by the customer, and any other miscellaneous adjustments that have been made to the current balance due on the account. Statements of this type are normally issued for each billing period specified in the contract that established the customer account, and note balances on account at the beginning and ending dates of the period. Customers can also sometimes request account statements that cover a longer period of time than just the most current billing period.

The statement of account is associated with many different types of accounts. A statement for a checking account at a bank is normally issued on a monthly basis, allowing the bank customer to see which deposits have been posted to the account, as well as which cheques have cleared during the period under consideration. The bank account statement will also include details about any other types of debits or credits that have had an impact on the account balance during the month, such as purchases made using a debit card, funds transferred into the checking account from a savings account, or even accrual of any interest, if the checking account carries that particular feature.

Most vendors will also issue a statement of account to each customer on a regular basis, usually monthly. Like the checking account, vendor statements will show the balance owed at the beginning of the statement period, any transactions that took place during the period, and the total balance on the account as of the closing date of the statement. If the vendor has provided the customer with a line of credit, the statement will also show the minimum payment due along with the total balance on account.

In all its forms, a statement of account helps the account holder to manage the account more efficiently. Various statements are also important when it comes to managing all financial resources under the control of the account holder, since they provide important documentation of all types of financial transactions associated with the account in question, In general, consumers are encouraged to read the detail on each statement carefully, to make sure all line items on the document arc accurate, and that the balance owed does match with the client's other financial records.

4. REMITTANCE ADVICE

A remittance advice is a letter sent by a customer to a supplier, to inform the supplier that their invoice has been paid. If the customer is paying by cheque, the remittance advice often accompanies the cheque.

Remittance advices are not mandatory; however they are seen as a courtesy because they help the accounts-receivable department-16 match invoices with payments. The remittance advice should therefore specify the invoice number(s) for which payment is tendered.

In countries where cheques are still used, most companies' invoices are designed so that customers return a portion of the invoice, called a remittance advice, with their payment. In countries where wire transfer is the predominant payment method, invoices are commonly accompanied by standardized bank transfer order forms which include a field into which the invoice or client number can be encoded, usually in a computer-readable way. The payer fills in his account details and hands the form to a clerk at, or mails it to, his bank, which will then transfer the money.

The employee who opens the incoming mail should initially compare the amount of cash received with the amount shown on the remittance advice. If the customer does not return a remittance advice, an employee prepares one. Like the cash register tape, the remittance advice serves as a record of cash initially received.

Modern systems will often scan a paper remittance advice into a computer system where data entry will be performed. Modern remittance advices can include dozens, or hundreds of invoice numbers, and other information. .

5. RECEIPTS

A receipt is raised by the firm and-issued to customers or debtors when they make payments in the form of cash or cheques.

It shows:

The name and address of the firm

i. The date of the receipt

ii. Amount received (cash or cheque or other means of payment)

iii. Receipt number.

6. PETTY CASH VOUCHERS

Petty cash is a small amount of discretionary funds in the form of cash used for expenditures where it is riot sensible to make any disbursement by cheque, because of the inconvenience and costs of writing, signing and then cashing the cheque.

A petty cash voucher is usually a small form that is used to document a disbursement (payment) from a petty cash fund. Petty cash vouchers are also referred to as petty cash receipts and can be purchased from office supply stores.

The petty cash voucher should provide space for the date, amount disbursed, naive of person receiving the money, reason for the disbursement, general ledger account to be charged, and the initials of the person disbursing the money from the petty cash fund. Sonic Petty cash vouchers are pre-numbered and sometimes a number is assigned for reference and control. Receipts or other documentation justifying the disbursement should be attached to the petty cash voucher.

When the petty cash fund is replenished, the completed petty cash vouchers provide the documentation for the replenishment check.

7. SALES INVOICE

A sales invoice in financial accounting is a tool that a company uses to communicate to clients about the sums that are due in exchange for goods that have been sold, A sales invoice should include information about which items the customer has purchased, the quantities he has bought, discounts he has received, and the total amount he owes. In addition, a sales invoice should contain a brief summary of the terms of the transaction, such as the acceptable lag time between the sale and the payment.

The sales invoice contains the following:

i) Name and address of the firm

ii) Name and address of the buying firm

iii) Date of making the sale � invoice date.

iv) Invoice number

v) Amount due (net of trade discount)

vi) Description of goods sold

vii) Terms of' sale

8. PURCHASES INVOICE

A purchase invoice is raised by the creditor and sent to the firm when the firm makes a credit purchase. It shows the following:

i. Name and the address of the creditor/seller

ii. Name and address of the firm

iii. Date of the purchase (invoice date)

iv. Invoice number

v. Amount due

vi. Description of goods sold

vii. Terms sale

9. CREDIT NOTES

A credit note is raised by the firm and issued to the debtor when the debtor returns some goods back to the firm. Its contents include:

i. Name and address of the firm

ii. Name and address of the debtor

iii. Amount of credit

iv. Credit note number

v. Reason for credit e.g. if the goods sent but of the wrong type

The purpose of the credit note is to inform the debtor or customer that the debtor�s account with the firm has been credited i.e. the amount due to the firm has been reduced or cancelled.

The credit note may also be issued when the firm gives an allowance of the amount due from the debtors. From the context we can assume that all credit notes are issued when goods are returned

10. DEBTORS NOTE

This is raised by the creditor and issued to the firm when the firm returns some goods to the creditor. It includes the following items:

i) Name and address of the firm

ii) Name and address of the creditor

iii) Amount of debit

iv) Debit Note number

v) Reason for the debit

 The purpose of the debit note is to inform the firm that the amount due to the creditor has been reduced or cancelled.

11. BANK STATEMENT

A bank statement or account statement is a summary of financial transactions which have occurred over a given period on a bank account held by a person or business with a financial institution.Bank statements have historically been and continue to be typically printed on one or several pieces of paper and either mailed directly to the account holder, or kept at the financial institution's local branch for pick-up. In recent years there has been a shift towards paperless, electronic statements, and some financial institutions offer direct download into account holders accounting software.

Some ATMs offer the possibility to print, at any time, a condensed version of a bank statement, commonly called a transaction history, or a transaction history may be viewed on the financial institution's website or available via telephone banking.

Paper statements

Historically, bank statements were paper statements produced monthly, quarterly or even annually. Since the introduction of computers in banks in the 1960s, bank statements have generally been produced monthly. Bank statements for accounts with small transaction volumes, such as investments or savings accounts, are usually produced less frequently. Depending on the financial institution, bank statements may also include certain features such as the cancelled cheques (or their images) that cleared through the account during the statement period.

Some financial institutions use the occasion of posting bank statements to include notices such as changes in fees or interest rates or to include promotional material.

Today, the monthly mailing of bank statements is the norm in many countries. It is not customary in some countries, such as Japan, where individual account holders are expected to keep track of deposits, withdrawals, and balances using their own passbooks at ATMs.

Electronic statements

With the wider access to the Internet and online banking, bank statements (also known as electronic statements or e-statements) can be viewed online, and downloaded or printed by the customer. To reduce the cost of postage and the generation of paper bank statements, some financial institutions encourage their customers to receive bank statements electronically, for example by charging a fee for paper statements. This may be as attachments to emails or, as a security measure, as a reminder that a new statement is available on the financial institution's website. Whether such statements are transmitted as attachments or from the website, they are commonly generated in PDF format, to reduce the ability of the recipient to electronically alter the statement.

Due to identity theft concerns, an electronic statement may not be seen as a dangerous alternative against physical theft as it does not contain tangible personal information, and does not require extra safety measures of disposal such as shredding. However, an electronic statement can be easier to obtain than a physical one through computer fraud, data interception and/or theft of storage media.

BOOKS OF ORIGINAL ENTRY

A Books of original entry (also referred to as Journal) is an accounting record that is used to record the different types of transactions in chronological order or date order. The reason for being called books of original entry is that this is the first place that business transactions are formally recorded. You can think of a Journal as a Financial Diary.

Speciallised Journals
Specialized Journals are journals used to initially record special types of transactions such as sales and purchases. All these journals are designed to record special types of business transactions and post the totals accumulated in these journals to the General Ledger periodically (usually once a month).

Sales Journal

The Sales Journal is a special journal where Credit sales to customers are recorded. Another name for this journal is the Sales Book or Sales Day Book.

Purchases Journal

The Purchases Journal is a special journal where Credit purchases from customers are recorded. Another name for this journal is the Purchases Book or Purchases Day Book.

Returns Inwards Journal

The Returns Inwards Journal is a special journal that is used to record the returns from debtors and allowances of goods sold on credit. Another name for this journal is the Sales Returns Book.

Returns Outwards Journal

The Returns Outwards Journal is a special journal that is used to record the returns to creditors and allowances of goods purchased on credit. Another names for this journal is the Purchases Returns Book.

The Cash Book

The Cash Book is used to record the receipt and payment of money by the business in the form of cash, or through the business bank account. It contains the cash and bank accounts.

The Petty Cash Book

This is just a fancy name that describes a special fund that is set up and used for minor and unanticipated cash expenses where a cheque can�t be written or the amount is so small that you don�t want to write a cheque. The petty cash account is based on the Imprest System which is a system of cash disbursement, cash expenditure and reimbursement of that expenditure.

 The General Journal

The Journal is a textual record of events (Debit and Credit) that is characterized by the fact that all the records it contains are in a sequential chronological order. The General Journal is used to record unusual or infrequent types of transactions. Type of entries normally made in the general journal include depreciation entries, correcting entries, and adjusting and closing entries.

Recording Transactions from Source Documents

Journals use the information from the source documents to create a chronological listing of all business transactions and detailed information about each transaction.Journals are preliminary records where business transactions are first entered into the accounting system. The journal is commonly referred to as the book of original entry. Specialized Journals-are journals used to initially record special types of transactions such as sales and purchases in their own journal.

Why Use Special Journals

-Groups and records transactions of a like nature. A familiar example is recording all cash received by a business in one place.

-Saves time with summary and less frequent postings to the General Ledger.

-Allows a business to have different individuals responsible for different journals thereby increasing internal controls and allocating the record keeping workload.

SALES JOURNAL (DAY BOOK)

The sales day book records details of all credit sales by the business. The details are obtained from copy sales invoices.

It is also called a sales day book. It records all the sales invoices issued by the firm during a particular financial period

The format is as follows (with simple records of invoice).