Source Documents, GST and the Cash Receipts/Payments Journals

Source Documents: Purpose and the Principle of Verifiability

In VCE Accounting, a source document is any original business record that provides written evidence that a financial transaction has occurred. Source documents are the foundation of the entire recording process: no entry should ever be made in a journal without a supporting source document. This requirement directly satisfies the qualitative characteristic of verifiability — an independent observer examining the same evidence should be able to confirm that the financial information faithfully represents the underlying transaction.

Source documents also support the historical cost basis of accounting. Because the document captures the agreed price at the time of the transaction, assets and expenses are recorded at the amount actually paid or received, not at an estimated or current-market value.

The four source documents you must be able to identify and interpret in Unit 3 are:

• Tax invoice (from a supplier): Issued when goods or services are purchased. Must be retained by the buyer as evidence of the purchase price and any GST paid. Required by the ATO for GST credits to be claimed on purchases of $82.50 (GST-inclusive) or more.
• Receipt (issued by the business): Issued to a customer when the business receives cash payment. Confirms the amount received and the GST component charged. For cash sales, this is the source document for the Cash Receipts Journal.
• Memo (internal memorandum): An internal document authorising a transaction where no external document exists — for example, recording bank fees charged directly to the account, drawing cash for personal use by the owner, or making an adjusting entry at period end. Memos are prepared by the business owner or manager.
• EFT (Electronic Funds Transfer) record: A bank-generated or system-generated confirmation that an electronic payment has been made or received. Commonly used for wages paid, online supplier payments, and direct debit receipts from customers. The EFT record serves the same evidentiary function as a cheque butt or receipt.

Each source document must be numbered sequentially and filed in date order. This supports faithful representation: the accounting records reflect only transactions for which objective evidence exists.

GST Fundamentals: The 10% Rate, Tax Invoices and the GST Clearing Account

The Goods and Services Tax (GST) is a broad-based consumption tax of 10% levied on most goods and services supplied in Australia. Businesses registered for GST collect GST on their sales (called GST collected) and pay GST on their purchases (called GST paid or input tax credits). The net amount — GST collected minus GST paid — is remitted to the Australian Taxation Office (ATO), usually on a quarterly Business Activity Statement (BAS).

Importantly, GST is not an expense or income for the business: it is merely collected on the government's behalf. This is why a separate liability account called GST Clearing is used.

The GST Clearing account:

• Is a liability account in the Balance Sheet.
• Is credited when the business collects GST on sales (increasing the liability to the ATO).
• Is debited when the business pays GST on purchases (reducing the net liability).
• At BAS time, the credit balance (if credits are less than collections) represents the amount payable to the ATO; a debit balance means the ATO owes the business a refund.

Calculating GST:

• To find GST from a GST-inclusive amount: divide by 11. Example: $220 inclusive price → GST = $220 ÷ 11 = $20; GST-exclusive price = $200.
• To find the GST-inclusive price from a GST-exclusive price: multiply by 1.1. Example: $300 × 1.1 = $330.
• To find GST from a GST-exclusive price: multiply by 0.1 (10%). Example: $300 × 0.1 = $30.

A valid tax invoice issued by a GST-registered supplier must show: the words 'Tax Invoice'; the supplier's ABN; the date; a description of goods or services; the GST-inclusive price; and either the GST amount or a statement that the price includes GST. Without a valid tax invoice, the business cannot claim an input tax credit (i.e., cannot debit GST Clearing).