what is a source document

Accountants use source documents to complete accounting journal entries about the transaction. Any information generated through source documents should be properly recorded in either the company’s journal, accounting software, or financial books. 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.

what is a source document

Source documents are critical to auditors, who use them as evidence that recorded transactions actually occurred. Attorneys may also need access to source documents, in order to bolster their positions on various issues involving litigation. A source document is also used by companies as proof when dealing with their business partners, usually in regard to a payments. 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. In certain instances, it may even be important to provide the chain of custody to be able to determine that the source document in question remained under your control.

Importance of Source Documents

Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. Purchase Order is an official document generated by a buyer of goods/services as an offer for the seller. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise.

what is a source document

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 (if any), 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. The pre-numbering of documents is particularly useful, since it allows a company to investigate whether any documents are missing. Bank statements are important because they summarize all of the transactions that have taken place in a bank account during a specific period. This information is necessary for the preparation of accurate accounting records.

What Are Source Documents?

Note that the purchase order and dispatch note are not records from which accounting transactions should be entered. This is because they do not create or satisfy financial obligations. In very small businesses, such as those that buy everything for cash, the only record of purchases will be the till receipt for payment.

  1. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year.
  2. These documents serve as proof not only that the transaction has occurred but also of the details of the transaction.
  3. The source document’s information should be recorded in the appropriate accounting journal as soon as possible after the transaction.
  4. In the business world, credit notes are raised before the bill is paid most of the time, so the amount is taken off the amount paid for the current purchase.

When a business generates a financial transaction, it creates a paper trail. This paper trail is called a “Source Document.” Your bookkeeper or accountant may ask you to provide them with some sort of source document to verify data and record transactions correctly. A good source document should describe the basic facts of the transaction such as the date, the amount, the purpose, and all parties involved in the transaction.

Acme will enter the payment against the amount owed by Maiden, leaving nothing outstanding, and will pay the check into the bank. If there are any problems with the shipment, debit and credit notes may be issued. Whether or not the customer issues a debit note, the response of the business (if it believes the complaint is justified) is to issue a credit note. When a business delivers goods or provides services and allows the purchaser time to pay (in other words, makes a credit sale) it will issue an invoice.

In the business world, credit notes are raised before the bill is paid most of the time, so the amount is taken off the amount paid for the current purchase. In the majority of cases, photocopies of source documents are legally permissible. According to the US Internal Review Service (IRS), as long as these photocopies are complete, legible, and accurate representations of the original document, they are legally acceptable. The supplier should have a completed paying-in slip stub/counterfoil in the paying-in book, showing the payment of the check into the bank. Sometimes, checks are not honored by the customer’s bank (i.e., they are dishonored). It is not normal in business for Acme to then issue a receipt for the cash received if it was in response to an invoice.

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‘Well, Mrs. Brown, I would be glad to, but I have no idea what source documents are,’ Kate says. Bank statements are crucial for the preparation of accounting records. However, larger businesses need more formal systems to ensure that purchases are authorized by the right person and that payments for goods are only made when they have been received and checked. You may well have encountered credit notes when shopping, such as when you return goods. When you have already paid for items, a credit note is offered to enable money to be taken off your next purchase. The invoice sets out the goods or services provided, gives the name and address of the purchaser and supplier, states the amount due (separately identifying any VAT), and normally gives a date or time limit for payment.

Some other types of source documents include payroll records, accounting notes and reports, leases, financial contracts, and credit memos. A credit card statement lists individual transactions, while a bank statement https://www.online-accounting.net/excel-bookkeeping-templates-free-small-business/ summarizes all of the transactions that have taken place during a specific period. Credit card statements are useful for verifying that an individual transaction is recorded correctly in the accounting records.

Examples of source documents are cancelled checks, credit memos, deposit slips, expense reports, invoices, material requisition forms, purchase orders, time cards, and sales receipts. These include accounting reports, invoices, and sales receipts where the accounting for product warranties company sells products. Internal source documents can be used to keep records and track business activity over time. There are many kinds of source documents, including payroll documents, sales receipts, invoices, purchase orders, and banking documents.

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