Source Documents

Learning objectives

By the end of this chapter, you should be able to:

• Explain why source documents are essential for reliable bookkeeping and trustworthy financial records.
• Distinguish between primary documents (original transaction evidence) and secondary documents (summaries produced from records).
• Describe the usual sequence of documents in the purchases cycle and how they link together.
• Use supplier statements of account to reconcile ledger balances and investigate differences.
• Apply practical document controls (such as pre-numbering and sequence checks) to strengthen internal control and reduce error and fraud risk.

Overview & key concepts

Every accounting entry should be supported by evidence. Source documents provide that evidence: they are the paperwork (or digital records) created when transactions are initiated, carried out, or settled. They help you record transactions completely, in the correct accounts, at the correct amounts, and in the correct period.

A useful way to think about source documents is by where they come from:

• Internal documentsare generated within the business (for example, purchase orders, goods received notes, internal returns notes, petty cash vouchers). They support authorisation and internal checking, but they may still require external confirmation.
• External documentsare created by third parties (for example, supplier invoices, supplier statements, bank statements, customer remittance advice). These are often more independent evidence, but they can still contain errors and should be checked (for example, price/quantity mismatches on invoices or occasional bank errors).

Source documents support the correct double-entry posting and help keep the accounting equation in balance:

Assets = Liabilities + Equity

A document does not change the equation by itself, but it supports recording the transaction that does.

Primary vs secondary documents

Primary documents

Primary documents are created at the point a transaction is authorised, happens, or is settled. They form the original evidence used to support accounting entries and checks.

Examples include:

• Purchase orders, goods received notes, supplier invoices
• Sales invoices, delivery notes, customer receipts
• Credit notes and debit notes
• Bank statements, paying-in slips, electronic payment confirmations
• Petty cash vouchers
• Loan agreements and repayment schedules

Note: some documents (for example, a purchase order) evidence authorisation/intent rather than the occurrence of the transaction. They still form part of the audit trail and are essential for internal control.

Secondary documents

Secondary documents summarise information that has already been recorded and are produced from the records.

Examples include:

• Aged payables/receivables listings
• Inventory movement reports
• Trial balance, management accounts, financial statements

Important clarification: a supplier statement is an external summary provided by the supplier. It is not “secondary” in the sense of being generated from your own accounting system, and it is often used as independent evidence when checking payables.

Purchases cycle documents

Typical sequence

A standard purchases cycle (for goods) commonly follows this flow:

1. Purchase order (PO)– the buyer’s authorised request to purchase, specifying items, quantities, and terms.
2. Goods received note (GRN)– confirmation of what actually arrived (quantity, date, condition).
3. Supplier invoice– the supplier’s request for payment, normally referencing the PO and/or delivery.
4. Remittance advice / payment record– evidence of settlement and allocation to invoices.

Why the sequence matters

The document sequence supports:

• Authorisation(only approved purchases go ahead)
• Completeness(received goods are recorded; invoices are not missed)
• Accuracy(prices and quantities match agreements)
• Cut-off(transactions belong in the correct period)

Three-way matching (control concept)

Before approving payment, many businesses compare:

• thePO(what was ordered),
• theGRN(what was received),
• theinvoice(what is being billed).

Differences should be resolved before payment is authorised.

Example of a mismatch and action

• PO shows 200 units at £15; GRN shows 195 received; invoice shows 200 billed.
• Action: query the short delivery and agree whether to (i) request a corrected invoice, (ii) raise a claim/adjustment, or (iii) confirm the remaining units are due later.

Purchases cut-off: GRN vs invoice timing

In accrual accounting, the purchase (and the related liability) is driven by the receipt of goods/services, not simply by the arrival of an invoice. GRNs are therefore particularly important at period end.

At period end: if goods have been received but the supplier invoice has not yet been processed, an accrual may be required (often described as “goods received not invoiced”), using GRNs and agreed prices as evidence.

Supplier statements of account and reconciliations

A supplier statement of account is a periodic summary sent by a supplier showing what they believe you owe at a particular date. It is useful because it provides an independent comparison against your payables ledger. Statements are also useful when checking whether supplier balances agree to totals shown in payables listings and (where used) the payables control account.

How a supplier statement differs from your payables ledger

• Yourpayables ledgershows what you have recorded (invoices, credit notes, payments, allocations).
• Thesupplier statementshows what the supplier has recorded for your account.
• The two should agree over time, but differences often arise due to timing, missing documents, or errors.

A practical reconciliation approach

A straightforward method is:

• Start with one balance(either your payables ledger balance for that supplier, or the supplier’s statement balance).
• List items appearing on one record but not the other, such as:

1. invoices processed by the supplier but not yet recorded by you
2. credit notes issued by the supplier but not yet received/processed
3. payments made by you but not yet allocated by the supplier
4. timing differences around returns, disputes, or documents crossing period end
5. posting errors (wrong amounts, duplicated entries, entries posted to the wrong supplier)

• Correct genuine omissions and errors in your records(post missing invoices/credit notes, reverse duplicates, re-post to the correct supplier account)
• Explain timing itemsthat should clear naturally (for example, payment in transit, late-arriving credit note)

Exam-focused signpost: questions often test whether you can separate (i) timing differences that do not require immediate correction from (ii) errors or omissions that do require postings.

Mini-scenario: supplier statement reconciliation

Your ledger shows Supplier Y payable of £4,200. Supplier Y’s statement shows £4,750. Investigation reveals:

• An invoice for£500dated 29 June is on the statement but not in your ledger (invoice received late).
• A payment of£50made on 30 June is in your ledger but not yet shown on the statement (payment in transit).

Clear explanation (ledger-focused)

• After posting the missing £500 invoice, your ledger would show£4,700.
• The remaining£50difference is explained by the payment not yet shown on the supplier statement, so the statement still shows£4,750.

Returns and allowances documents

Debit notes and credit notes (with practical nuance)

When goods are returned or a price allowance is agreed, the documentation should clearly evidence the adjustment. In many systems, the supplier issues a credit note to confirm that the customer’s balance has been reduced.

Some organisations also use debit notes as a formal notification (for example, the buyer’s claim for returns or pricing disputes). The label can vary by organisation and jurisdiction, and in some contexts a debit note may evidence an increase rather than a decrease. What matters for bookkeeping is the direction of the adjustment and ensuring both parties’ records end up consistent.

Cash and bank entry documents

Key documents

• Bank statements– independent evidence of cash movements processed by the bank (receipts, payments, charges, interest).
• Paying-in slips / deposit records– support deposits of cash and cheques.
• Remittance advice– helps allocate receipts or payments to specific invoices.
• Electronic payment confirmations– evidence of transfers and settlement dates.

Why bank documents are critical

Bank statements often include items not yet recorded in the cash book, such as:

• bank charges
• interest
• direct debits/standing orders
• dishonoured cheques
• card processing fees

These items must be identified, recorded, and reconciled to maintain an accurate cash balance.

Retail cash sales summaries

Retail businesses often rely on system-generated evidence:

• Till roll: transaction-by-transaction record from the point-of-sale system.
• Z reading: end-of-day (or end-of-shift) summary total from the register/system.

These records help reconcile:

• sales recorded,
• receipts expected (cash and card),
• cash actually banked.

Discrepancies (shortages/overages) should be investigated promptly and recorded consistently according to the entity’s policy.

Petty cash imprest system

How it works

An imprest system keeps petty cash at a fixed float. Small payments are made from the float and supported by vouchers. Periodically, the float is topped up back to the agreed level based on the vouchers.

Key documents:

• Petty cash voucher(amount, purpose, date, recipient, authorisation)
• Supporting receipts(where available)
• Petty cash summary(optional internal listing of vouchers for the period)

This system strengthens control over small, high-volume cash expenses.

Document controls

Effective controls reduce missing documents, duplicate postings, and unauthorised transactions.

Common controls include:

• Pre-numbering: unique document numbers (sales invoices, credit notes, GRNs, vouchers).
• Sequence checks: review for missing or duplicated numbers and investigate promptly.
• Authorisation: approval limits and sign-offs (especially for purchases and credit notes).
• Access controls: restricted ability to create/void documents.
• Retention and filing: consistent storage (physical or digital) with clear retrieval rules.
• Timely processing: prompt recording to avoid cut-off errors and missed liabilities.

Core theory and frameworks

Source documents and the accounting equation

Each transaction affects at least two components of the accounting equation. Source documents help identify:

• which accounts are affected (asset, liability, equity, income, expense),
• whether it is cash or credit, and
• the correct date for recognition.

Double-entry logic supported by documents

The debit/credit decision is driven by the substance of the transaction, supported by documentation.

Common patterns:

• Asset increasesare usuallydebits;asset decreasesare usuallycredits.
• Liability increasesare usuallycredits;liability decreasesare usuallydebits.
• Incomeis usuallycredited.
• Expensesare usuallydebited.

These are general rules; always apply them to the specific account and the specific transaction.

Cash transactions vs credit transactions

Source documents help distinguish timing and recognition:

• Cash purchase: supported by receipts and bank payment evidence; no outstanding liability remains after payment.
• Credit purchase: supported by invoices and delivery evidence; a liability remains until payment.
• Cash sale: supported by till evidence and banking records (or cash counts).
• Credit sale: supported by sales invoices and dispatch/delivery evidence; a receivable exists until collection.

Exam-focused signpost: errors often arise from missing documents or timing differences (for example, GRNs processed but invoices delayed, or bank charges not entered in the cash book).

Worked walkthrough: following the document trail

Narrative scenario

ABC Corporation, a retail business, enters into the following transactions during the month:

1. ABC issues a purchase order to Supplier X for200 unitsof merchandise at£15 per unit.
2. The goods are delivered in full. ABC prepares a goods received note confirming200 units received.
3. Supplier X sends an invoice for£3,000(200 × £15), matching the purchase order and the goods received note.
4. Later in the month, ABC returns20 defective unitsto Supplier X. Documentation supports a reduction of£300(20 × £15).
5. ABC depositscash sales of £1,200into its bank account. Till records support the cash sales figure. The bank statement also showsbank fees of £25charged during the month.
6. ABC operates a petty cash imprest system with a float of£500. During the month,£100is spent on office supplies and supported by a petty cash voucher. The petty cash float is replenished to restore the imprest level.

Required

• Record the purchase and return transactions.
• Update the cash book for bank statement items not yet recorded and explain what can (and cannot) be reconciled from the information given.
• Record the petty cash spending and replenishment.
• State the cash sales evidenced by the till and banking information.
• Confirm the supplier payable balance from the documents and identify any discrepancies.

Solution

Step 1: Purchase documentation → accounting entry

PO issued: no accounting entry (it authorises the order but does not prove receipt).
GRN confirms receipt: supports recognising inventory received; at period end, if an invoice is missing, an accrual may be needed.
Invoice received for £3,000: confirms the amount payable.

Entry (invoice received in the same period as receipt):

• Dr Inventory£3,000
• Cr Trade payables (Supplier X)£3,000

Step 2: Return documentation → accounting entry

The key accounting effect is:

• the amount owed to the supplier reduces, and
• inventory (or the cost base) reduces for the goods returned.

Entry:

• Dr Trade payables (Supplier X)£300
• Cr Inventory£300

Payable balance after the return:
£3,000 − £300 = £2,700 (credit balance)

Step 3: Bank statement items → cash book update (separate from reconciliation)

A reconciliation normally starts with two balances (cash book bank balance and bank statement balance). This scenario does not provide opening or closing balances, so the focus is on the cash book updates required by bank-originated items.

Bank fees (£25) recorded by the bank (cash book update required if not already recorded):

• Dr Bank charges expense£25
• Cr Bank£25

Deposit of cash sales (£1,200):

• If the deposit has already been recorded in the cash book as banked receipts, no further entry is required.
• If it has not yet been recorded, record it as:
• Dr Bank£1,200
• Cr Sales (cash sales)£1,200

Reconciliation statement (what can be concluded here):
Based on the limited information provided, the only definite adjustment needed is the bank fee (if unrecorded). Any remaining difference in practice would commonly be timing items (such as deposits in transit or unpresented payments), but none are specified in this scenario.

Step 4: Petty cash imprest

Record spending (voucher evidence):

• Dr Office supplies expense£100
• Cr Petty cash£100

Replenish to restore the float:

• Dr Petty cash£100
• Cr Bank£100

Petty cash returns to £500 after replenishment.

Step 5: Cash sales evidenced by documents

Till records support cash sales banked of £1,200.

Cash sales evidenced (based on the information given): £1,200
(This conclusion depends on the scenario’s statement that till records support the amount deposited.)

Step 6: Supplier balance and discrepancy check

Supplier documents show:

• Invoice:£3,000
• Return adjustment:£300

Ledger balance after posting the entries: £2,700 payable, which agrees to the net document position.

Discrepancy conclusion: none identified from the documents provided.

Interpretation of the results

The document trail supports each stage of the accounting record:

• PO supports authorisation.
• GRN supports receipt and cut-off (especially around period end).
• Invoice supports the measured liability (subject to checking for errors).
• Return documentation supports reducing both the payable and the inventory held.
• Bank statement evidence highlights items initiated by the bank that may require cash book updates.
• Till evidence supports the sales figure and links to banking.
• Petty cash vouchers support controlled recognition of small expenses.

Common pitfalls and misunderstandings

• Treating summaries as sufficient evidence:a report is useful, but underlying invoices, credit notes, GRNs, receipts, and bank statements are usually stronger evidence.
• Recording only when the invoice arrives:liabilities may need recognition when goods/services are received; GRNs are central to period-end cut-off.
• Over-relying on document labels:debit note/credit note usage varies; focus on the accounting effect (increase/decrease) and consistency between parties.
• Blurring cash book updates with reconciliation:first update the cash book for missing items (fees, interest), then prepare a reconciliation statement if balances are provided.
• Assuming cash banked equals cash sales:investigate floats, timing, shortages, and non-cash receipts unless the scenario explicitly links till totals to deposits.
• Weak numbering controls:missing numbers can hide unrecorded transactions; duplicate numbers can cause double postings.
• Ignoring supplier statement differences:mismatches often indicate missing invoices/credit notes, unallocated payments, or posting errors that need correction.

Summary and further reading

Source documents are the evidence base of bookkeeping. They support accurate double-entry posting, correct classification between cash and credit transactions, reliable measurement, and clean cut-off between periods. In the purchases cycle, purchase orders, goods received notes, and invoices link together to confirm authorisation, receipt, and billing, while return documentation supports consistent adjustments.

Supplier statements provide an external check on payables and are commonly used to identify missing documents, timing items, and posting errors. Bank statements support cash accuracy and highlight items that must be entered into the cash book. Retail till evidence and petty cash vouchers support high-volume or small-value transactions where tight control is essential. Document controls—such as pre-numbering, sequence checks, and authorisation—reduce the risk of missing entries, duplicate postings, and fraud.

FAQ

What makes a good source document?

It clearly identifies the parties, date, description, quantities, amounts, and authorisation where relevant, and it can be traced to (and from) the accounting entry.

How does three-way matching reduce errors?

It compares what was ordered (PO), what arrived (GRN), and what is being billed (invoice). Differences are flagged before payment, reducing overpayments, duplicate payments, and unauthorised purchases.

How should differences on a supplier statement be handled?

Separate differences into:

• items missing from your ledger (post these if valid), and
• timing items (explain these and monitor until they clear).
• Common causes include late invoices, unprocessed credit notes, unallocated payments, and posting errors.

Does the liability arise when the invoice arrives?

Not necessarily. If goods/services have been received, an obligation may exist even if the invoice is delayed. GRNs and agreed prices help support period-end accruals.

Why can the bank statement and cash book differ?

Because they are updated at different times and may contain different items. Bank charges, interest, and direct debits often appear on the statement before they appear in the cash book.

Are debit notes and credit notes always used the same way?

No. Usage varies by organisation and jurisdiction. Focus on whether the document increases or reduces the amount owed and ensure both parties’ records reconcile.

Summary (Recap)

This chapter explains how source documents support accurate bookkeeping and strong internal control. It distinguishes internal and external evidence, clarifies the difference between primary documents and record-based summaries, and outlines the purchases cycle document flow. It explains how returns documentation affects payables and inventory, how bank statement items drive cash book updates, and how supplier statements are reconciled to ledger balances. It also covers retail sales evidence, petty cash imprest control, and key document controls such as pre-numbering and sequence checks to reduce errors.

Glossary

Source document
An original record (paper or electronic) created when a transaction is authorised, occurs, or is settled, used as evidence within the accounting records.

Purchase order (PO)
A buyer’s authorised request to a supplier for goods or services, specifying quantities, pricing, and key terms.

Goods received note (GRN)
A record prepared when goods are delivered, confirming what was received and when, often used to support inventory recognition and period-end cut-off.

Supplier invoice
A supplier’s bill requesting payment, setting out the goods/services supplied and the amount due.

Supplier statement of account
A periodic summary sent by the supplier showing the transactions and balance they believe is outstanding for the customer at a particular date.

Debit note
A document notifying an adjustment that affects the recipient’s account (debiting the recipient’s account in the issuer’s records). In some purchasing systems, buyers use a debit note as a claim for returns or allowances. The key is the accounting effect supported by evidence and that both parties’ balances reconcile.

Credit note
A document issued (commonly by a supplier) confirming a reduction in the amount the customer owes, usually due to returns or allowances.

Remittance advice
A payment communication that identifies which invoices a receipt or payment relates to, supporting correct allocation in the ledger.

Bank reconciliation
A process that compares the cash book bank balance to the bank statement balance, explaining differences and updating records for missing items.

Petty cash imprest system
A petty cash control method where a fixed float is maintained, spending is supported by vouchers, and replenishment restores the float to its agreed level.

Till roll
A point-of-sale record listing individual retail transactions, used to support sales and receipt evidence.

Z reading
A point-of-sale end-of-period summary showing total sales and related totals for a day or shift.

Document controls
Procedures that safeguard documents and reduce errors, such as pre-numbering, sequence checks, authorisation, access restrictions, and orderly retention.