Edexcel IGCSE Accounting: Business documentation and books of original entry (4AC1) – Revision Notes

These notes condense sections 2.1 Business documentation and 2.2 Books of original entry of Topic 2, Introduction to bookkeeping, in the Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016. Paper 1 draws on topics 1 to 3. For full explanations and worked examples, use the study guide. All businesses and figures are invented, and amounts are in dollars ($).

Links: Accounting course hub, printable checklist, free 10-minute diagnostics. For exam-style questions, use the practice set.

Note: the specification names only the documents and books listed under 2.1 and 2.2. Terms such as imprest system, contra entry, trade and cash discount, analysis columns and narrative are standard practice added here to help you prepare them, not specification wording.

2.1 a) Why businesses use documents

Documents give evidence for every entry, let the two parties check amounts, help settle disputes, give each transaction a reference number and support the audit trail from the first record to the final accounts.

2.1 b) and c) The documents at a glance

Document	Who issues it	Key contents	Trigger
Purchase order	Buyer	Order number, quantity, description, agreed price, delivery details, authorisation	Buyer wants goods
Sales invoice	Seller	Invoice number, items, list price, trade discount, amount due, terms	Goods sold on credit
Purchase invoice	Same invoice, as received by the buyer	As above	Goods bought on credit
Credit note	Seller	Credit note number, invoice reference, goods returned or overcharge, amount	Returns or error
Statement of account	Seller	Opening balance, invoices, credit notes, payments, closing balance	End of period
Remittance advice	Buyer	Invoices paid, credit notes deducted, amount sent	Buyer pays
Cash receipt	Receiver of money	Date, amount, reason, signature	Cash received
Petty cash voucher	Spender	Voucher number, date, item, amount, authorisation, signature	Small cash payment

Must-know distinctions

• Sales invoice and purchase invoice are the same piece of paper seen from two sides.
• An invoice shows one transaction. A statement shows the whole account for a period.
• A credit note reduces what the buyer owes. It does not raise it.
• A remittance advice comes from the buyer. A statement comes from the seller.
• Trade discount is deducted on the invoice before any entry is made. Cash discount is given for early payment and appears in the cash book.

Method in steps: preparing an invoice

1. Quantity x price for each line.
2. Add the lines: goods at list price.
3. Deduct trade discount (percentage of list price).
4. The result is the amount due.

Mini example: 50 units at 8.00 is 400.00. Trade discount 25% is 100.00. Amount due 300.00.

Method in steps: preparing a statement of account

1. Opening balance.
2. Add each invoice.
3. Deduct each credit note and each payment.
4. Closing balance = amount now due.

2.2 a) Purpose of books of original entry

A book of original entry is where a transaction is first recorded, in date order, from its source document. Reasons:

• one type of transaction per book keeps the records organised
• totals can be posted to the ledger, not every line
• staff can share the work, and errors are easier to find
• a permanent first record exists if a ledger entry goes missing.

2.2 b) The books and their source documents

Book	Records	Source document
Purchases day book	Goods bought on credit	Purchase invoices
Sales day book	Goods sold on credit	Sales invoices
Purchases returns book	Goods returned to suppliers	Credit notes received
Sales returns book	Goods returned by customers	Credit notes issued
Three-column cash book	Cash, bank and discount	Cash receipts, cheques, bank paying-in slips
Petty cash book	Small cash payments	Petty cash vouchers
Journal	Everything else	Journal vouchers and the evidence for the item

Day books and returns books use the amount after trade discount. A cash purchase or cash sale never goes in a day book.

Returns and where the totals go

Mini example: the buyer returns 10 of the 50 units, listed at 8.00 with the same 25% trade discount. The credit note is 10 x 8.00 = 80.00, less 25% = 20.00, so 60.00. Its source is the credit note, and it is recorded in the purchases returns book by the buyer and the sales returns book by the seller.

Book	Total is later posted to	Each line is later posted to
Purchases day book	Purchases account	Supplier’s account
Sales day book	Sales account	Customer’s account
Purchases returns book	Purchases returns account	Supplier’s account
Sales returns book	Sales returns account	Customer’s account
Petty cash book	Each analysis total to its expense account	Not applicable

The posting itself is part of ledger accounting, which has its own pages in this series. Here the skill is to prepare the book correctly and total it accurately.

The three-column cash book

Side	Discount column	Cash column	Bank column
Debit (receipts)	Discount allowed	Cash received	Cheques received, money paid in
Credit (payments)	Discount received	Cash paid	Cheques paid

Method in steps

1. Enter opening balances on the debit side.
2. Enter each item in date order on the correct side.
3. Put a contra entry (C) on both sides of the book.
4. Total the discount columns but do not carry them into the balances.
5. Balance cash and bank separately.
6. Bring the balances down on the debit side.

Mini example: cash 40.00 and bank 500.00 at the start. Cash sale 60.00. Customer owing 200.00 pays by cheque after 2% discount, so 196.00 in the bank column and 4.00 discount allowed. Supplier owed 150.00 is paid by cheque after 2% discount, so 147.00 and 3.00 discount received. Cash of 70.00 is paid into the bank (contra).

DEBIT                  Disc   Cash   Bank
Balance b/d                   40.00 500.00
Sales                         60.00
Customer (cheque)      4.00         196.00
Cash (C)                             70.00
                       4.00  100.00 766.00
Balance b/d                   30.00 619.00

CREDIT                 Disc   Cash   Bank
Bank (C)                      70.00
Supplier (cheque)      3.00         147.00
Balance c/d                   30.00 619.00
                       3.00  100.00 766.00

The petty cash book

• Imprest system (a common method, not a term in the specification): a fixed float is paid out first. Spending is reimbursed in full at the end of the period.
• Each payment needs a numbered voucher.
• Columns: receipts, date, details, voucher number, total, then analysis columns.
• Total column = sum of analysis columns. Check this before posting.
• Reimbursement = total spent. It is a payment in the cash book (usually bank) and a receipt in the petty cash book.

Mini example: float 80.00. Payments are 22.40, 18.60 and 9.00. Total spent 50.00. Balance before reimbursement 30.00. Reimbursement 50.00 restores the float to 80.00.

The journal

Used for non-routine transactions. Layout: date, account to debit, account to credit, amounts, narrative.

Typical use	Debit	Credit
Buying a non-current asset on credit	Asset account	Supplier
Writing off an irrecoverable debt	Irrecoverable debts	Customer
Correcting an error	Account that should have been charged	Account wrongly charged
Opening entries for a new business	Assets	Liabilities and capital

Mini example, opening journal: bank 5,000.00, motor van 7,500.00 and inventory 1,500.00 are debited (total 14,000.00). Loan 3,000.00 and capital 11,000.00 are credited (total 14,000.00). Totals agree.

Quick self-test

1. Name the document a buyer sends to ask a seller for goods.
2. Goods are listed at 30 items at 12.00 each, with 20% trade discount. What is the invoice total?
3. Which document tells a seller which invoices a cheque settles?
4. A statement opens at 420.00, which is then paid in full. During the month there is an invoice for 640.00 and a credit note for 55.00. What is the closing balance?
5. A customer owing 240.00 earns 5% cash discount. What cheque is received, and which column records the discount?
6. In which book is a credit sale first recorded?
7. A petty cash float of 150.00 is used to pay out 112.50. What is the reimbursement, and what is the balance before reimbursement?
8. Which book records the purchase of office equipment on credit?
9. Why are the discount columns not balanced like cash and bank?
10. Cash is paid into the bank. How is it recorded?

Answers

1. Purchase order.
2. 30 x 12.00 = 360.00. Less 20% (72.00) = 288.00.
3. Remittance advice.
4. 420.00 + 640.00 - 55.00 - 420.00 = 585.00.
5. Discount 12.00, so the cheque is 228.00. Discount allowed, debit side.
6. Sales day book.
7. Reimbursement 112.50. Balance before it 37.50.
8. The journal.
9. They are totalled and posted to the discount accounts. They are not money in hand.
10. A contra entry: debit bank column, credit cash column, marked C on both sides.

Where marks are usually lost

• Using list price in a day book instead of the amount after trade discount.
• Putting a cash sale or cash purchase in a day book.
• Forgetting that a credit note reduces the amount owed.
• Showing a contra entry on one side only.
• Adding the discount column into the cash or bank balance.
• Mixing up discount allowed (debit side) and discount received (credit side).
• Reimbursing the petty cashier a different sum from the total spent.
• Omitting the narrative in a journal entry, or making debits and credits unequal.
• Writing totals without checking them against the source documents.

Frequently asked questions

What is a credit note? A credit note is issued by a seller when goods are returned or overcharged, and it reduces the amount the buyer owes. It is the source document for the returns books.

What is a remittance advice? A remittance advice is sent by a buyer with a payment to show which invoices are being paid. One that does not name the invoices paid makes it hard for the seller to match the payment.

Which side of the cash book is discount allowed on? Discount allowed to customers is recorded on the debit (receipts) side of the three-column cash book, and discount received from suppliers on the credit (payments) side. Mixing up the two sides is a common error.

What is a petty cash voucher? A petty cash voucher records one small payment from petty cash and is signed by the person authorising it. Vouchers are numbered and entered in the petty cash book, with each payment placed in the right analysis column.

Official syllabus

Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016, published by Pearson Education Limited – Topic 2 Introduction to bookkeeping, sections 2.1 Business documentation and 2.2 Books of original entry.