Source documents can be important in the event of audits or transaction disputes and cannot simply be personal handwritten notes. 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. Personal notes and record-keeping are not considered source documents, as they can neither prove that a transaction has occurred nor prove the details of a transaction.
A materials receipt that specified the objects purchased and the price paid, but that was scanned without the name of the supplier would not qualify. A document that presented all the information in the original receipt, but that had been retyped in Word or Excel format would also not qualify. Kate drives herself to Mrs. Brown’s office armed with all the source documents she can find. This morning she got a phone call from her accountant asking her to bring her the source documents she has for the month.
If the journal entry is incorrect, it can make the entire accounting record inaccurate and cause tremendous problems for the business going forward. The examination of source documents, therefore, is a critical first step to keeping accurate accounting records. These include bank statements, deposit slips, purchase orders, sales receipts, and packing slips. Source documents are classified as internal or external, depending on where they originate. First, original source documents serve as evidence that a business transaction did occur. They also provide the details of the transaction, including dollar amounts, the date of the transaction, the parties involved, and information as to the purpose of the transaction.
- Not only do they show the current balances for the company’s accounts, but they can also be used to show patterns of income and spending and provide a picture of the overall health of a company.
- Accounting documents and journals are used to maintain records of a company’s financial standing.
- The final category of source documents used to create accounting records consists of banking documents.
- Purchase Order (PO) – is an official document generated by a buyer of goods/services as an offer for the seller.
- You may well have encountered credit notes when shopping, such as when you return goods.
- The examination of source documents, therefore, is a critical first step to keeping accurate accounting records.
In contrast, bank statements are important for summarizing all of the transactions that have taken place in a bank account during a specific period. To complete the accounting records, a bookkeeper needs to have source documents to work from. 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. For evidentiary purposes, electronic images of source documents are generally acceptable, though paper-based documentation may still be required in some cases. They are important because they prove, first, that a transaction occurred, and they also serve as evidence of the details of that transaction should there ever be a discrepancy or dispute.
Source Documents
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A failure in the system at this point would mean that an unscrupulous trader could simply issue invoices for non-existent goods or services to businesses taken from a trade telephone directory and get paid. Fourth, Maiden checks the invoice against the purchase order and possibly the dispatch note. The aim is to ensure that the goods were genuinely ordered and have been received. Second, Acme sends the 5,000 CDs, and at the same time encloses a dispatch note giving the shipment details. Credit Note – A credit note is a document sent by a seller to the buyer notifying that a credit has been made to their account against the goods returned by the buyer. Sales Order (SO) – is a document issued to the customer and generated by the firm itself.
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This section provides an overview and description of the source documents themselves. They come in many shapes and sizes, but they can be split into three categories. Debit Note – A debit note is a document sent by a buyer to a seller while returning goods received on credit. It is usually necessary to retain source documents for several years. The Internal Revenue Service mandates retention intervals for some types of documents related to payroll. If there is any question regarding the retention period for a document, consult with a knowledgeable attorney.
Purchase Order (PO) – 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. Isn’t it amazing how important a simple piece of paper can be in the accounting industry? Ask a question about your financial situation providing as much detail as possible. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources.
In accounting, the definition of a source document is a piece of paper that proves that a transaction has occurred. Source documents contain pertinent information about the transaction, such as the date, the dollar amounts, the involved parties, and the purpose of the transaction. These documents serve as proof not only that the transaction has occurred but also of the details of the transaction. In business accounting, source documents would include items such as invoices, receipts, deposit slips, checks, travel documents, timecards, orders, credit memos, etc. With advances in technology, source documents now also include electronic records, such as an emailed receipt or an electronic bank statement. Purchase receipts, paid invoices, and banking documents such as statements, deposit receipts, and cancelled checks are all types of external source documents.
Importance of Source Documents
Source documents are the first document to record a transaction which works as an evidence containing details of a transaction. They are external documents or documents related to external activities which are first input in the accounting source systems. ‘As long as it shows proof of a financial transaction, then yes, it is a source document,’ Mrs. Brown says. 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.
Most can be classified as either internal or external documents, depending on whether they were generated within or outside a company. The source document is a good internal control and provides evidence a transaction occurred. Providing source documents to your bookkeeper or accountant in a timely manner assists them in preparation types of operational projects of financial statements and accurately analyzing your business activity. Each time a company makes a financial transaction, it generates some paper trail. If a small business writes a check from its checking account for office supplies, for example, the check and office supplies receipt become the source documents.
Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. Also, another entry reversing the payment will have to be made in Acme’s books. This ensures that Maiden is once again shown https://www.quick-bookkeeping.net/are-my-health-insurance-premiums-tax/ as still owing the money due for the 5,000 CDs. The purchase order must be authorized at an appropriate level of management within Maiden. This is a form sent to Acme setting out the 5,000 CDs to be supplied and the price to be paid (already agreed between the companies).