0452 · 2.2Business documents

Business documents and credit transactions

0:00Noor Stationery has sold goods, accepted a return and received part of the payment. Each event changes what the customer owes. Recording every piece of paperwork as another sale would count the same transaction several times. Business documents let us separate a sale, an adjustment and a payment, then record the right information. Business documents are written or electronic records that provide information about business transactions. They show evidence such as who was involved, what happened and the amount concerned.

0:28By the end of this video, you will recognise eight documents and explain their different purposes. For each one, you will learn who issues it, who receives it, what it shows and which book of prime entry it supplies. Book-keeping is the detailed recording of a business's financial transactions. A credit transaction allows payment to take place later rather than immediately. That delay creates two separate events, because supplying goods and receiving payment happen at different times.

0:54The documents must distinguish the amount owed from the money actually received. A source document provides evidence and information used to make an accounting entry. Books of prime entry are records in which transactions are first entered before transfer to ledger accounts. Business documents are used as sources of information for these books. The video on books of prime entry shows how each book is prepared.

Invoices and trade discount

1:16An invoice is a document issued by a seller showing goods supplied, their prices and the amount due. For a credit sale, the seller sends it to the customer and retains a copy. It identifies both parties and gives the date, quantities, unit prices, any trade discount and payment terms. These details explain how the seller calculated the customer's obligation. The seller's copy supplies information for the sales journal. From the buyer's viewpoint, the same document is a purchase invoice and supplies information for the purchases journal.

1:46Here, the buyer purchases goods for resale. The document's role depends on which business's records you are considering, even though its contents remain the same. On the third of May, Noor Stationery sells ten notebook bundles to a local bookshop. The unit list price is one hundred dollars, and payment is due within thirty days. Trade discount is a reduction from list price given to trade customers. Noor allows ten per cent, so we must calculate the reduction before finding the invoice total.

2:13Ten bundles at one hundred dollars each give a list price total of one thousand dollars. Ten per cent of one thousand dollars is one hundred dollars. Subtract that discount from the list price total. The invoice total is nine hundred dollars, which is the amount the customer initially owes. Noor's sales journal records nine hundred dollars because that is the agreed price after trade discount. Trade discount itself is never recorded in the ledger accounts.

2:38The bookshop enters the same nine hundred dollars in its purchases journal. An invoice establishes the amount due, while a later payment needs separate evidence. A debit note is a document sent by a buyer requesting a reduction in the amount owed to a seller. It may concern goods returned or an overcharge. The buyer states the reason and the amount requested, usually with a reference to the original invoice.

3:00The buyer's copy of the debit note, or the seller's credit note once it arrives, provides information for the buyer's purchases returns journal. On the sixth of May, the local bookshop returns two damaged bundles from Noor's sale. After trade discount, each bundle cost ninety dollars. Multiplying two by ninety dollars gives a requested reduction of one hundred and eighty dollars. The bookshop sends Noor a debit note with these details, but its request still needs the seller's agreement.

3:27A credit note is a document issued by a seller reducing the amount owed by a customer. Noor sends one to the bookshop on the eighth of May, after accepting the return.

Returns, adjustments and payment records

3:36It shows the goods concerned, the reason for the reduction and the amount allowed. Noor's copy supplies information for its sales returns journal. The bookshop checks the credit note it receives against its debit note. The credit note reduces the original nine hundred dollars by one hundred and eighty dollars. The customer now owes seven hundred and twenty dollars. No money has changed hands during this adjustment. The debit note requests a reduction, whereas the credit note confirms the seller's allowance.

4:03A cheque counterfoil is the retained stub recording the details of a cheque issued. On the twelfth of May, Noor pays Paper Mill Supplies four hundred dollars by cheque. The supplier receives the cheque, and Noor keeps the counterfoil. The payee is the person or business receiving a payment. Noor's counterfoil records the date, the payee and the amount. Noor uses the counterfoil as a source for payments in the cash book.

4:26The cash book records money received and paid, including bank transactions. The counterfoil describes an outgoing payment, which settles an amount Noor owed to this supplier. Its usefulness comes from preserving payment details after the cheque leaves the business. A paying-in slip is a form completed when cash or cheques are deposited into a bank account. The business gives the completed form to the bank and keeps its counterfoil or stamped copy.

4:50It shows the account name, the date, the notes and coins, any cheques and the total paid in. These details provide a source for bank receipts in the cash book. On the fifteenth of May, Noor pays in three hundred dollars of notes and coins from cash sales. The cheques box shows zero, so the total paid in is three hundred dollars. This deposit is not a new sale, because Noor recorded those cash sales when customers paid at the shop.

5:13A cheque counterfoil supports a payment out, while a paying-in slip supports money paid into the bank. A receipt is written proof that money has been received. The business receiving the money issues it to the payer and keeps a copy or electronic record. It shows the date, the amount, the payer, the method and the purpose of payment. The retained copy provides information for the money received side of the issuer's cash book.

5:36The payer keeps the original as evidence of payment. On the twentieth of May, the bookshop pays Noor five hundred dollars by cheque as a part payment of the invoice. Noor issues a receipt as evidence of that payment. Subtract five hundred dollars from the seven hundred and twenty dollars previously owed. The remaining amount due is two hundred and twenty dollars.

Bank and account statements

5:56A bank statement is a document issued by a bank showing transactions and the balance on a customer's account. The bank sends it to the account holder or makes it available online. It records deposits, withdrawals, bank charges and payments made through the account. Its balance shows the bank's recorded position at the statement date. A direct debit allows an organisation to collect authorised payments from the customer's bank account.

6:18A standing order is an instruction from the account holder to the bank to pay a fixed amount regularly. These payments and bank charges may appear before Noor has entered them in the cash book. The statement supplies information for those missing entries and helps check existing records. Noor's bank statement for May opens with a balance of two thousand dollars. On the fourteenth of May, the cheque for four hundred dollars is paid, so the balance falls to one thousand six hundred dollars.

6:44The deposit of three hundred dollars on the fifteenth of May raises it to one thousand nine hundred dollars. After bank charges of fifty dollars on the thirty-first of May, the closing balance is one thousand eight hundred and fifty dollars. Noor had not yet entered those charges, so the statement is the source for that entry in the cash book. For an account holding Noor's money, the bank owes that money to the business.

7:05So the statement shows the deposit and the balance as credits, and the cheque and the charges as debits. Noor's cash book records the deposit on the debit side of its bank account, with the cheque and the charges on the credit side. The bank's view is the opposite of the business's cash book, so the bank's credit is the business's debit. A statement of account is a summary sent by a supplier showing transactions with a credit customer and the balance owed.

7:29It is usually sent monthly. The document brings together invoices, credit notes and payments for that customer. Unlike an individual invoice, it summarises several events rather than requesting payment for one particular supply. On the thirty-first of May, Noor sends the bookshop a statement of account. It lists the invoice of nine hundred dollars, then the credit note for one hundred and eighty dollars. The balance after the return is seven hundred and twenty dollars.

7:53The cheque for five hundred dollars received on the twentieth of May reduces the balance owed to two hundred and twenty dollars. The bookshop uses it to check its own records, not as a source for a book of prime entry. An invoice and a statement of account can both show money owed, but they do different jobs. Record the sale from the invoice, then use the statement to check the customer's overall position.

8:15Recording the statement again would duplicate transactions already entered. Similarly, a receipt proves payment, whereas an invoice shows the charge for goods supplied.

Digital documents and exam practice

8:23These business documents can be produced and recorded manually or digitally. In a manual system, invoices, debit notes, credit notes and receipts are written on paper, with copies kept. Cheque counterfoils and paying-in slips come in printed books, and their details are entered by hand in the accounting books. In a digital system, accounting software produces invoices, credit notes and statements of account and emails them to customers. Online banking shows bank statements on screen and makes payments and deposits electronically.

8:52Electronic production does not change a document's accounting purpose. A digital credit note still reduces the customer's obligation, and an emailed statement still summarises transactions. Information may be typed into a system or transferred automatically between records. In either case, the business must preserve the evidence and avoid entering the same transaction twice. Common examination mistakes involve confusing the issuer, the purpose or the direction of payment. The buyer sends a debit note, and the seller issues a credit note.

9:23A cheque counterfoil supports an outgoing payment, while a paying-in slip supports a bank deposit. Always identify whose records the question concerns before choosing the source document. Paper One contains forty multiple-choice questions, and Paper Two contains five compulsory structured questions. You may need to recognise a document, calculate an invoice total or explain its use. Identify means name or select, while calculate means work out from given figures. Explain means give reasons, why and how, supported by evidence.

9:54Consider an exam-style question about Noor's customer returning damaged goods. Identify the document the customer sends to request a reduction, then explain the purpose of Noor's reply. The customer sends a debit note. Noor issues a credit note to confirm the reduction in the amount owed for the accepted return. Another question might ask why a statement of account should not be entered as a new sale. The invoices listed on it have already supplied the information for recording those sales.

10:22Entering the summary again would duplicate the transactions. The answer gains marks by linking the checking purpose of the statement to the risk of recording each sale twice. Business documents tell us whether goods were supplied, an amount was adjusted or money changed hands. Invoices establish charges, debit notes request reductions and credit notes confirm allowances. Payment records provide evidence of money received or paid, while statements summarise activity for checking.

10:48Whether paper or digital, each document must be used for the event it actually represents.