Source Documents
Last Updated :
21 Aug, 2024
Blog Author :
Rutan Bhattacharyya
Edited by :
Ashish Kumar Srivastav
Reviewed by :
Dheeraj Vaidya
Table Of Contents
What Are Source Documents in Accounting?
Source documents are original records that include the information supporting or substantiating business transactions recorded in the accounting system. They offer tangible proof that a transaction occurred. Moreover, they serve as evidence for tax preparation and audit procedures, thus streamlining operations and improving transparency.
Previously, businesses stored such a document as a physical hard copy. That said, they may store these documents electronically with a date and timestamp for reference. There are different types of source documents. A few of them are delivery dockets, receipts, deposit slips, delivery dockets, orders, and quotes.
Table of contents
- Source documents meaning refer to an activity trail or original records that support the ledger accounts and journals during an economic or tax audit. They streamline the audit procedures by increasing transparency.
- Some source documents are quotes, invoices, orders, delivery dockets, and receipts.
- There are various benefits of source documents in accounting. For example, they minimize the input of inaccurate details in books of accounts and reduce the possibility of fraud.
- The details typically included in source documents are the transaction date, the transaction's overall value, authorizing signatures, and the explanation of the deal.
Source Documents Explained
Source documents meaning refer to internal documents containing crucial details regarding business transactions. They prove that the recorded financial transactions occurred and are thus essential for the accounting methods. Moreover, these documents are crucial for auditing procedures. Since the paper trail of all transactions is easily available to auditors, it enhances the audit's validity and objectivity.
A source document usually includes the following details:
- The total value of a transaction
- Date of the transaction
- The deal's explanation
Moreover, such documents include one or multiple authorizing signatures.
One must note that producing the original documents is not always mandatory. For example, per The Internal Revenue Service or IRS, photocopies of the documents are legally acceptable. However, the photocopies must be an accurate representation of the real documents. Moreover, they must be legible and complete.
Most accountants, bookkeeping service providers, and lawyers recommend keeping these documents for 5 to 7 years. Whereas, per IRS, small organizations must preserve all documents substantiating income, credits, and deductions until that specific year's statute of limitations runs out. Depending on the business's tax status, this may take 3 to 7 years.
Businesses can take the following measures to file and monitor source documents in accounting while ensuring that they are accessible:
- Assign a prefix number to every document. This will help one find any misplaced documents.
- Arrange all documents by category or alphabetically to retrieve them easily.
- Check whether the recorded account balances were reconciled with the relevant documents.
- Utilize an automated file system to simplify reconciling and tracking.
Uses
Let us look at some uses of source documents.
- Businesses use them to prepare books of accounts.
- They help in auditing procedures by increasing transparency.
- One can use them to acquire authorization for any amount paid.
- They are tangible evidence of a business transaction.
- Businesses can utilize these documents to reconcile accounts.
- Such a document can prove that a business owns a certain property.
- Organizations can use them to rectify an undercharge or overcharge made in a customer's account.
Types
Some of the different types of source documents are as follows:
- Delivery Dockets: In most cases, these documents include a description of the goods delivered, enabling customers to compare them with their order after receiving them.
- Deposit Slip: When customers pay using cash or check, the seller prepares a bank deposit slip and presents it to the bank with cash or check. The deposit slip includes a breakdown of the check and cash amounts and the overall amount being deposited.
- Quotes: A customer can choose to receive quotes from a seller for the goods they want to purchase. Once the former places an order, the latter converts the document into a sales invoice.
- Receipts: Vendors may give a receipt after the consumers pay the invoice. If the payment is in cash, issuing a receipt to confirm the payment is good practice. Receipts are generally automatically issued when buying goods from an online retailer or a store.
- Sales And Purchase Invoice: Sellers produce a paper mentioning a sale's specifics when they sell an item. For example, they will mention how long the buyer will have to make the full payment or whether paying any amount before the delivery of goods is necessary.
- Orders: Organizations fill out orders if they need to buy something. The order form can be as simple as a page from a duplicate book or one provided by sellers via their catalog or online store. However, since a buyer might not know the cost when placing an order, it is unlikely for the order forms always to include the cost.
Examples
Let us look at a few source document examples to understand the concept better.
Example #1
Suppose Building Dreams, Inc, a construction company, purchased raw materials from its vendor, TBZ, Inc. The latter issued an invoice specifying all details of the sale, including how much time the former has to pay the invoice amount. This invoice is a source document acting as tangible proof that a transaction occurred between the two companies.
Example #2
While auditing Dream tees, an online retailer of t-shirts, the auditors found discrepancies concerning the payments made to vendors. However, the issue was resolved after they checked two key source documents, the company's bank statements, and the purchase invoices. As a result, they served as evidence that the company's financial statements were accurate.
Importance
One can understand the importance of these documents by going through these points:
- They increase transparency during an audit by acting as proof of transaction. This, in turn, improves an audit's validity.
- Such documents reduce the input of incorrect details in the business's books of accounts.
- They minimize the chances of fraud in a business.
- The documents can help businesses prepare their financial statements.
- Such documents can help organizations defend themselves in the case of tax-related disputes.
Differentiate Between Source Documents And Vouchers
The meaning and purpose of source documents and vouchers can be confusing for a person new to accounting. However, individuals can eliminate confusion by understanding how the two concepts differ. In that regard, knowing their distinct features is crucial. So, let us look at them.
Source Documents | Vouchers |
---|---|
These documents include crucial details of a business transaction. | Vouchers are documents an organization's accounts payable department uses to record the amounts paid to a vendor. |
Examples of these documents are invoices, receipts, delivery dockets, etc. | A few examples of these documents are debit notes and letters of credit. |
These documents help in preparing vouchers. | They help in analyzing transactions. |
Companies prepare these documents when a transaction occurs. | Organizations may prepare vouchers at the time when a transaction takes place. Alternatively, they may prepare it later. |
Frequently Asked Questions (FAQs)
Such a document is decent internal control, and they act as evidence of a financial transaction associated with a business. Providing these documents to an accountant or bookkeeper in time helps them prepare a business's financial statements. Moreover, it helps them accurately analyze their business activities.
Accounting clerks check these documents, enter the necessary data into a computerized accounting system, and maintain an extensive range of records per the established guidelines. Also, one must remember that they perform basic calculations from these documents. For example, they compute the overall amount payable to vendors from the invoices given by them.
A credit note issued by a seller to a buyer is a source document used in the case of a sales return journal. It is tangible proof of a drop in sales. Companies give this receipt to customers who have returned any goods they bought.
No, a ledger is not a source document. Instead, it is an account summarizing transactions posted in multiple journals.
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