What are Source Documents in Accounting?

process costing Review Service , as long as these photocopies are complete, legible, and accurate representations of the original document, they are legally acceptable. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

The original is delivered to the customer, and the duplicate is retained as a record in the business. An invoice is a bill that’s drawn for customers after purchasing goods or receiving services by the business. It’s an internal document sent to the customer after the item has shipped and helps to maintain cash flow and streamlines the accounting process. A Bank Reconciliation Statement includes all transactions that have affected an account, dates of the transactions, the current balance, and any discrepancies. A source document is one record used to create accounting transaction records (e.G., Invoices).

Helping Learn Accounting – Financial & Managerial

It’s essential that the auditor has access to a clear paper trail of all transactions to confirm the accuracy of bank and credit card balances. This enhances transparency and ensures that the audit will run more smoothly. A credit card statement is a summary of how you used your credit card during a billing period.

These details are entered as a sales invoice by the seller, and a purchase invoice by the buyer. Various regulations mandate that some source documents be retained for a number of years. It may also be prudent to retain these documents irrespective of regulations, if only to provide evidence in the event of a lawsuit, or to provide better customer service. Once the information in a source document has been recorded in the accounting system, the source document is indexed for easy access and archived. Documents generated within the past year are generally stored on-site, with older documents being stored in less expensive off-site storage facilities.

They show all of the information you need to enter them into a ledger. This data includes the date of the transaction, the amount, the recipient, and a description. Your accountant can then accurately input all of the information into your financial statements. There are a few general accounting source documents that are important to retain for your records.

This documentary evidence contains the nature of the transaction, the name, and address of parties, date and amount of transaction, etc. The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Eric Gerard Ruiz is an accounting and bookkeeping expert for Fit Small Business. He completed his degree in accountancy at Silliman University and is a CPA registered in the Philippines. Before joining FSB, Eric worked as a freelance content writer with various digital marketing agencies in Australia, the United States, and the Philippines.

What Are Source Documents in Accounting?

This is because they do not create or satisfy financial obligations. Papers that your business obtains from other people or businesses are referred to as external source documents. It’s advised to keep your source documents for five to seven years for tax purposes, though rules will differ. Depending on your tax status, this could take three to seven years. An invoice is a source document that shows all details of the sale, including payment terms.

Each journal entry includes narration that provides a summary of the transaction. After analysing each transaction for debit and credit elements, the journal makes it easier to post to the ledger. Purchase Order – is an official document generated by a buyer of goods/services as an offer for the seller. There are 4 different types of purchase orders Standard PO, Contract PO, Blanket PO and Planned PO. The time card has evolved over time, from the traditional paper time card to the magnetic card or fingerprint records. The goods received note can be sent to the seller when the transaction has been completed.

In very small businesses, such as those that buy everything for cash, the only record of purchases will be the till receipt for payment. For most retail businesses, however, the source document that accountants will work from is the till roll. This shows the total amount taken in for goods and services, whether by cash, check, or card. You may well have encountered credit notes when shopping, such as when you return goods.

Just as the name suggests, it is a document that serves as the proof or source of the transaction. When many transactions occur, it is impossible to record them all in a journal. It will be simple to post the transaction in a ledger once entered into the journal.

Source document definition

Purchase receipts paid invoices, and banking documents such as statements, deposit receipts, and cancelled checks are all types of external source documents. Now that you know what they are, it is time to discuss the importance of source documents in accounting. Your source documents affect many aspects of the accounting and bookkeeping process. When you carefully organize and maintain them, they provide you with an easy paper trail.

• Additionally,auditorscheck theannual financial statementsof a business to ensure their accuracy.
• It can also be electronic, such as an electronic record of the hours worked by an employee, as entered into a company’s timekeeping system through a smartphone.
• The term “goods” refers to the specific items or products the company sells.
• A debit note is a document that records the fact that an invoice has been paid, resulting in a decrease in the amount owed to the supplier.
• A packing slip describes the items shipped to a customer, and so supports the recordation of a sale transaction.

Internal source documents are created and used within your business. They’re often used to make decisions about different aspects of your business, such as assisting with forecasting, setting pricing, and maintaining accurate financial records. In accounting, a “source document” refers to any document that substantiates and evidences a transaction. It’s important to retain and organize these documents to research problems or questions that arise concerning transactions. You also might need to provide these to the IRS if it audits you or questions anything related to your tax return. Bank statements are important because they summarize all of the transactions that have taken place in a bank account during a specific period.

Deposit Slip

The journal or special purpose subsidiary book records all business transactions. We must then transfer the entries to the appropriate ledger accounts. Internal source documents in accounting are created and used within your business. They are often used to make decisions about different aspects of your company. The data in such documents help forecast, set pricing, and maintain accurate financial records.

It also gives the vendor a document that can used to record the sale of goods. Examples of source documents, and their related business transactions that appear in the financial records, are noted below. A source document is the original document that contains the details of a business transaction. A source document captures the key information about a transaction, such as the names of the parties involved, amounts paid , the date, and the substance of the transaction. Source documents are frequently identified with a unique number, so that they can be differentiated in the accounting system.

Due to the importance of internal source documents in South Africa, we advise you to start tracking your source documents automatically. A source document is an original document containing essential details that can support or substantiate a transaction. Specifically, the transactions must be entered into an accounting system at some point. Transactions can be recorded in the books, only on the basis of documentary evidence.

Cash memo

In accounting, we categorize these two types of source documents as either internal or external. Cheques are issued by the account holders for making different payments. The counterfoils or notes on the cheque book carry details regarding the payment made. These are deposited together with the pay-in-slip, which can be used as a source document. A source document is an original document, such as an invoice or a canceled check, which contains essential details that will either support or substantiate a transaction. It doesn’t have to be a paper document, as electronic records are acceptable.

After the initial recording, all documents should be preserved and organized into a file and put into a system so they can be retrieved at any time. It is also important to make a record of general internal control procedures specifying who in the firm can access and authorize payments, orders, and other transactions. Source documents are a very important part of accurate business accounting. They serve as proof of the details of a transaction, and they are part of the key first step in the accounting process, so keeping accurate records of their contents is vital.

The delivery note is a document that is sent together with a shipment of goods that provides proof that the goods or products have been delivered. A purchase order is a source document issued by the buyer to the seller. Initially, it requests a product or a service, but it is a binding agreement once the seller accepts the purchase order.

The pre-numbering of documents is particularly useful, since it allows a company to investigate whether any documents are missing. It is a special purpose subsidiary book when a book records similar business transactions. For example, a cashbook records all cash transactions, whereas another book records all credit purchase transactions, and so on. A bank statement is used to enter payments into the accounting system and match them to invoices. The source document’s information should be recorded in the appropriate accounting journal as soon as possible after the transaction. After recording, all source documents should be filed away in some system where they can be retrieved if and when needed.