Source documents in accounting serve as evidence when auditors need to review the financial statements of a company to ascertain if there was indeed a business transaction. Every time a business is involved in a financial transaction, a paper trail is generated. In the accounting process, these source documents are used as the starting point for recording transactions in journals. From journals, the transaction information is then transferred to ledgers, and ultimately, it helps in the preparation of the company’s financial statements.

• The goods received note will typically show particulars of the goods received, the parties to the transaction, the date, and quantity of products received.
• According to the IRS, small businesses must preserve any documentation that substantiates deductions, income, and credits until the statute of limitations for that particular tax return has run out.
• In order to reaffirm the accuracy of the company’s balances in individual accounts, auditors need full access to all the documents.
• It has all details about the credit sale such as the purchaser, date, price, quantity, etc.
• Purchase Order (PO) – is an official document generated by a buyer of goods/services as an offer for the seller.

It contains the details like the name of the purchaser, description of goods sold, i.e. quantity and price of the units sold, total amount, and tax. Your company should also establish standard procedures and controls for the generation and management of source documents. A properly managed paperwork system results in accurate and complete accounting records.

What Are Source Documents in Accounting?

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 accounting source documents diagram used in this tutorial is available for download in PDF format by following the link below. The next step in the accounting cycle is to take the data from the source documents and use this to record a journal entry.

The sales order will typically show details of the goods being ordered date, quantities, agreed prices, and also refer to the purchase order from the buyer. The company must classify all financial source documents so that you can easily retrieve them at a future date in the event of any questions. The most popular way is to file it all in chronological order first, then alphabetically.

When a consumer pays their bill, they send a remittance advice to the supplier that includes the payment amount and the invoice numbers. If payment is made using internet banking, it will either be posted along with the check or separately. The seller will produce a paper outlining all the specifics of the sale when an item is sold. If the vendor does not require payment in full before shipping the goods, they will specify their payment terms, or how long the buyer has to pay, on their invoice. Auditors require complete access to all the papers in order to confirm the accuracy of the company’s balances in each account. All of a company’s source papers should be saved and stored for later use in order to improve transparency and streamline operations.

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• A source document, in accounting, refers to the original document that contains the details of a business transaction.
• Source documents are used to record transactions because they are original and show an objective report of the economic activities of each transaction.
• This time, the invoice already contains the unit price of the items and the total amount due.
• Whenever an item is sold, the vendor will provide a document that contains all of the transaction’s details.
• They are external documents or documents related to external activities which are first input in the accounting source systems.

This documentary evidence contains the nature of the transaction, the name, and address of parties, date and amount of transaction, etc. When the bank statement arrives, it will show the amount of the deposit as an addition to the account balance of the depositor. In addition, the term Service Invoice can also be used by your company when selling a service. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.

Time Value of Money

It can also be digital, such as an electronic version of an employee’s working hours input into a firm’s timekeeping system via a phone. Additionally, auditors check the annual financial statements of a business to ensure their accuracy. Part of their audit involves reviewing the details of various transactions, which are originally shown in the source documents. The source documents serve as proof of amounts accurately recorded in later steps of the accounting cycle, from the accounting journals and ledger to the final financial reports. It is necessary to have business transactions recorded for reference purposes, and at every financial transaction of a company, a paper trail is generated.

Read on as we take a deeper look at a list of these distinct business source papers and an explanation of their functions. Let us look at a few source document examples to understand the concept better. Although citation generators are useful for saving time and gathering information quickly, they are not 100% accurate.

On the other hand, a Debit Note is issued by the buyer to the seller which reduces the buyer’s accounts payable with the seller. It can be used in cases when your company needs to pay a creditor or supplier a large amount to settle an obligation, but paying such amount is impractical and not secure. A Source Document is an original record that serves as an evidence of a transaction or event that has occurred in a company during an accounting period. The delivery note will normally show particulars of the goods delivered, the parties to the transaction, the date, and quantity of products delivered. A quotation is issued by a seller to a prospective buyer and makes a written offer to supply goods or services at a given price. Payment confirmations are documents serving as proof that payment has been made by electronic transfer (payments made through the internet, using a cellphone, computer or other electronic means).

Nowadays, these documents do not necessarily need to be a physical hard copy – they may be in a traceable electronic form. It is important to note that an estimate or quote is not a source document that triggers an accounting entry in the accounting books of the company. They are only used to inform the customer and are attached to the invoice as reference. A Cash Voucher is a document that is used to support the payment of cash by the company instead of issuing a check when purchasing products and services or settling debts. This is used as a paper trail to monitor and control cash payments made by your company.

Debit Note

Once it is approved, a purchase order is issued and sent to the receiving department when the goods received are compared with the purchase order. 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. Source documents arrive in a company through many different departments, mostly via sales and purchase departments. Instead, it is an account summarizing transactions posted in multiple journals. Sometimes, you may notice a barcode that is printed at the bottom of the cash register receipt.

When auditors later analyse a firm’s financial statements and are required to validate the activities, source documents are often considered as proof. They normally include an explanation of a commercial transaction, the transaction’s date, the number of funds involved, and a signature of approval. Most source documents are stamped to show that they have been approved or to put down the actual date or the accounts to report the underlying transaction.

The identification of a person who is an authorised signatory of the account wherein the cheque is generated is required on the cheque. Each cheque has a unique number that you must enter into the accounting system. If it is left empty, anybody can write it in with their name and deposit the cheque, resulting in the theft of the funds. Welcome to the lesson on source documents in accounting, where we’ll learn what these are, why they’re important and where we’ll look at some common examples.

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. Let’s walk through an example of how a source document is used in a typical business transaction.

When purchasing goods from a store or an online retailer, receipts are typically automatically issued. Invoice/Bill – It is an evidence prepared by the seller to document credit sales. It has all details about the credit sale such as the purchaser, date, price, quantity, etc. Sales Order (SO) – is a document issued to the customer and generated by the firm itself.

So if your business receives cash payments and then wants to deposit this, you would make a deposit at the bank and keep a copy of the deposit slip. Deposit slips are documents that serve as proof that cash has been deposited into a bank account. They are the primary source documents for sales and similar forms of income. The bank will keep a record of the transaction so source document that it appears on both the payor’s and the recipient’s bank statements. When paying with cash, it’s a good practice to have a receipt as confirmation of payment.