What is the main function of business documents?

To serve as written evidence of transactions — Business documents are the written evidence that confirms a transaction took place.

Business documents are divided into two groups, namely:

Source documents and non-source documents — Business documents are divided into source documents and non-source documents.

Which of the following is a source document?

Invoice — The invoice is a source document that is the basis for recording a credit sale or purchase.

Which of the following is a non-source document?

Purchase order — A purchase order supports a transaction but is not used to record accounting entries.

Source documents are used as the basis for recording entries in the:

Books of first entry — Source documents form the basis of entries in the books of first entry such as journals.

Why are business documents important for LHDN?

For tax compliance and auditing — Documents provide evidence for auditing and tax compliance with LHDN.

In the flow of a credit sale, which document is used to record the sale?

Invoice — Only the invoice (a source document) is used to record the credit sale.

Non-source documents serve to:

Support and prepare the transaction — Non-source documents support the buying and selling process but are not recorded in the books.

Without business documents, accounting records would be:

Unverifiable and unreliable — Without documents, transactions cannot be verified and records lose their reliability.

A cheque counterfoil is classified as a:

Source document — A cheque counterfoil is a source document for a payment made through the bank.

SPM Prinsip Perakaunan — Business Documents Notes & Exercise

Business documents are the written evidence of every transaction that takes place between a business and its customers, suppliers or bank. Without them, transactions cannot be verified and the accounting records cannot be trusted. They are also essential for auditing and for tax compliance with LHDN.

Two Groups of Documents

Business documents fall into two main groups:

Source documents — documents that serve as the basis for recording entries in the books of first entry. Examples are the invoice, receipt, credit note, debit note and cheque counterfoil.
Non-source documents — documents that support a transaction but are not used to record accounting entries. Examples are the quotation, purchase order, delivery order and statement of account.

Key idea

Source document → the basis for entries in the books of first entry. Non-source document → only supports and prepares the transaction.

Flow of Documents

Example

A customer requests a quotation (non-source), then sends a purchase order (non-source). The seller delivers the goods with a delivery order (non-source) and afterwards issues an invoice (source). Only the invoice is used to record the credit sale in the sales journal.

Features of a Good Document

A good business document must contain complete information such as the date, the names and addresses of both parties, the details of the goods, the quantity, the price and the total. Documents are usually prepared in several copies: the original is given to the other party, while a duplicate is kept as a reference and as proof. The reliability of a document supports the objectivity principle of accounting — that every entry must be backed by evidence that can be verified. Documents must also be kept for a set period for auditing and tax reference. With orderly filing, a business can settle disputes with customers or suppliers far more easily.

Remember

Not every business document is recorded in the accounting books. Only source documents form the basis of entries; non-source documents merely support the buying and selling process.