What is a Source document?

A source document is a written document that provides details of a transaction and the evidence that the
transaction has taken place.

Features/Contents of Source Documents

Source documents contain the following information:

• Date of transaction.
• Names and addresses of parties involved in the transaction.
• Description of the goods or services.
• Amount involved.
• Terms and conditions related to trade discounts, cash discount and other details related to delivery.
• Signature of the concerned parties

Types of Source Documents

1. Invoice

Issued by the seller to the buyer. Informs how much to be paid for the goods or services supplied. Original copy is
send to buyer and duplicate retained by the seller.

1. Credit Note

A credit note is issued by the seller to the buyer. In cases where the goods have been overcharged, or when the
buyer returns damaged goods. It informs the buyer about the amount credited do the buyers account. Original
copy is send to the buyer and duplicate is retained by the seller.

1. Debit Note

It is issued by the seller to the buyer. It acts as an additional invoice in case the seller has undercharged his goods
or services. It informs the buyer about the extra amount which has to be paid to the seller. Original copy is send
to the buyer and duplicate is retained by the seller.

1. Payment Voucher

It records the payment of money to a third party.

1. Cheque Counterfoil

It contains information related to cheques issued by the business. It usually informs about the cheque number,
payee’s name and the amount paid.

1. Receipt
It acts as an acknowledgement for the payment received. Some retailers also issue the till slip which is considered
as goods as a receipt. The original copy is given to the person paying whereas the duplicate is retained by the
receiver.

1. Bank Statement

This is a report sent by the bank to its current account holder. It contains information related with money
deposited into the bank and money withdrawn out of the account during a particular period of time.

FINANCIAL MANAGEMENT

• the process of planning and controlling a company's financial resources

• is about controlling the flow of money in and out of the organization.

SOURCES OF FINANCES/ CAPITAL

Internal and external finance

Internal finance is obtained from within the business itself.

• Retained Profit: profit kept in the business after owners have been given their share of the profit. Firms
can invest this profit back in the businesses.

• Sale of existing assets: assets that the business doesn’t need anymore, for example, unused buildings or
spare equipment can be sold to raise finance

• Sale of inventories: sell of finished goods or unwanted components in inventory.

• Owner’s savings: For a sole trader and partnership, since they’re unincorporated (owners and business is
not separate), any finance the owner directly invests from hos own saving will be internal finance.

External finance is obtained from sources outside of the business.

• Issue of share: only for limited companies.

• Bank loans: money borrowed from banks

• Debenture issues: debentures are long-term loan certificates issued by companies for the people buy
and the business can raise money. But this finance acts as a loan- it will have to be repaid after a
specified period of time and interest will have to be paid for it as well.

• Debt factoring: a debtor is a person who owes the business money for the goods they have bought from
the business. Debt factors are specialist agents that can collect all the business’ debts from debtors.

• Grants and subsidies: government agencies and other external sources can give the business a grant or
subsidy

• Micro-finance: special institutes are set up in poorly-developed countries where financially-lacking

people looking to start or expand small businesses can get small sums of money. They provide all sorts of
financial services
 • Crowdfunding: raises capital by asking small funds from a large pool of people, e.g. via Kickstarter. These
funds are voluntary ‘donations’ and don’t have to be return or paid a dividend.

Short-term and long-term finance

Short-term finance provides the working capital a business needs for its day-to-day operations.

• Overdrafts: similar to loans, the bank can arrange overdrafts by allowing businesses to spend more than
what is in their bank account. The overdraft will vary with each month, based on how much extra money
the business needs.

• Trade Credits: this is when a business delays paying suppliers for some time, improving their cash
position

• Debt Factoring:

Long-term finance is the finance that is available for more than a year.

• Loans: from banks or private individuals.

• Debentures

• Issue of Shares

• Hire Purchase: allows the business to buy a fixed asset and pay for it in monthly instalments that include
interest charges. This is not a method to raise capital but gives the business time to raise the capital.

• Leasing: this allows a business to use an asset without purchasing it. Monthly leasing payments are
instead made to the owner of the asset.

Uses Of Funds in Business

• Purchasing inventory
• Investing in equipment
• Building a website
• Developing your marketing
• Expanding your business

Importance of Financial Management

• Planning for the future - Financial management allows you to plan for important future goals like
retirement, your children's education, buying a house, etc. Proper planning ensures you will have enough
money when the time comes.
• Managing cash flow - Tracking income and expenses, creating a budget, and managing debt help ensure
you have enough cash to pay for expenses and prevent overspending. Good cash flow management
prevents financial crises.
• Achieving financial goals - With financial planning, you can set savings, investments, and other financial
targets and create a roadmap to achieve them. Financial management keeps you focused and accountable.
 • Reducing risk - Managing finances includes assessing risks from investments, debt levels, insurance
coverage gaps, etc., and minimizing them. It prevents avoidable financial losses.
• Increasing savings - Budgeting, smart spending, and investing allow you to maximize savings. Higher savings
provide a cushion for emergencies and help build wealth over time.
• Getting better loan terms - Lenders offer better interest rates and loan terms to individuals and businesses
that practice good financial management. It saves significantly on interest costs.
• Making informed decisions - Financial data and reporting allow you to analyze where your money is going,
how assets are performing, and where changes need to be made. It empowers smart financial decisions.

FINANCIAL STATEMENTS

Income Statements

Accounts are the financial records of a firm’s transactions. Final Accounts are prepared at the end of the financial
year and give details of the profit or loss made as well as the worth of the business.

Profit This is when sales revenue exceeds costs

Profit = Sales Revenue – Total cost

When the total costs exceed the sales revenue, then a loss is made.

How to increase profit?

• Increase sales revenue

• Cut costs Why is profit important to a business?
• It is a reward for enterprise: entrepreneurs start businesses to make a profit
• It is a reward for risk-taking
• It is a source of finance: after payments to owners, profits are reinvested back into the business for further
expansion (this is called retained earnings)
• It is an indicator of success
Income Statement

An income statement is a financial document of the business that records all income generated by the business as
well as the costs incurred by the business and thus the profit or loss made over the financial year. Also known as
profit and loss account.

Formulars Involved

• Sales Revenue = total sales

• Cost of Sales = total variable cost of production + (opening inventory of finished goods – closing inventory
of finished goods)
• Gross Profit = Sales Revenue – Cost of Sales Expenses: all overheads/fixed costs
• Net Profit = Gross Profit – Expenses
• Profit after Tax = Net Profit – Tax Dividends: share of profit given to shareholders; return on shares
• Retained Profit for the year = Profit after Tax – Dividends. This retained earnings is then kept aside for use
in the business.

Uses of Income Statement Income statements are used by managers to:

• Assist in better decision making - Reading the income statement enables the business owners to be aware
of the current financial footing of the company. With the accurate figures presented on the income
statement, business owners can make swift and wise decisions about the company's expenditure.

• Track the company's profitability - With an income statement, it provided the business owner, the
shareholders, and stakeholders the knowledge of the company's financial standing.

• Essential report for tax payments - Operating your business in a country means companies will have to
bear the various forms of business taxes, following the tax regulations of that country. Paying business
taxes is mandatory by law.

Statement of Financial Position

The balance sheet shows the value of a business’ assets, liabilities and capital at a particular time. It is also known
as ‘statement of financial position’.

Assets

Assets refer to everything a company owns, from cash to equipment to intellectual property.

On a balance sheet, they are divided into

a) current and
 b) long-term assets.

Current assets

Current assets are used to generate value within the fiscal year. They include any assets that your company:

• expects to realize, sell or consume in its normal operating cycle

• expects to realize within 12 months of the reporting date

• holds for trading

Current assets generally include the following:

• Cash-Cash refers to the physical money a business has in notes and coins

• Accounts receivable and other receivables/ debtors - refers to a person or company that owes money to
the business.

• Inventory/stock- the goods, materials, and products that a company holds for sale or use in production

• Prepaid expenses - business cost that is paid in advance.

• Cash at bank - the total amount of money a company currently holds in its bank accounts.

Long-term assets/fixed assets

Long-term assets are resources that a business owns and uses for more than one year. They can be physical, like
buildings and equipment, or intangible, like patents and software.

Examples of long-term assets:

• Property, plant, and equipment: Land, buildings, machinery, vehicles, and fixtures
• Investments: Stocks, bonds, real estate, or investments in other companies
• Intellectual property: Trademarks, patents, and client lists

Tangible and intangible assets

• A tangible example is a physical object you can touch, like a chair or a car, tangible means something you
can physically hold
• intangible example is something not physical, like a reputation, idea, or copyright; intangible means
something you cannot touch or see
Examples of tangible items:

• buildings, furniture, vehicles, land, machinery, inventory, and cash.

• Examples of intangible items:
• Brand recognition, Goodwill, Patents, Copyrights, Trademarks, Reputation, Customer loyalty, Intellectual
property, Knowledge, and Trust.

Types of capital in the balance sheet

Working Capital:

Calculated as current assets minus current liabilities, this represents the liquidity of a company and its ability to
meet short-term financial obligations.

Capital employed, also known as funds employed, is the total amount of capital used for the acquisition of profits.
It is calculated as ((fixed assets + current assets) - current liabilities).

• Working Capital = Current Assets – Current Liabilities

For example, if a company has $100,000 in current assets and $30,000 in current liabilities, it has $70,000 of
working capital.

Capital employed

Capital employed, also known as funds employed, is the total amount of capital used for the acquisition of profits.
It is calculated as:

• Capita employed = Fixed Assets + Current Assets - Current Liabilities

Capital Employed = $100,000 + $350,000 – $50,000 = $400,000

Now calculate the working capital!

Solution…………………………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………….. 2 mks
Balance sheet equation

The balance sheet equation is Capital=Assets – Liabilities or Assets = Liabilities + capital

This equation is also known as the accounting equation.

Exxon Mobil Corp.’s (XOM) balance sheet in millions as of March 31, 2024:

• Total assets were $377,918

• Total liabilities were $164,866

• Total equity was $213,0521

The accounting equation is calculated as follows:

$213,052 (equity/capital) = $377,918 Assets - $164,866 (total liabilities)