The actual foundation to record business information is known as source documents. 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. It is not necessary to use a copy as a source document. 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.
Did you know?
Every time a business does a money transfer, it leaves a paper trail, and this paper trail is referred to as a source document.
Also Read: What is Cash Memo? See Cash Memo Template
What is a Source Document?
The source document is critical to the accounting and bookkeeping procedure since it establishes the existence of a business deal. Source papers serve as an activity trail that backs up the financial journals and ledger accounts during an economic or tax audit. You would preserve source papers for your firm in the same way you would keep invoices for tax-deductible things.
If your finances are audited, the source documents show that you made those transactions. The same is true for your company, except that you preserve original documentation for all financial transactions, not only charitable gifts.
As soon as feasible following the transaction, record the information from the source document in the relevant accounting journal. All source papers should be stored in some database after recording to be recovered as needed. In some cases, it may be necessary to provide the chain of custody in order to prove that the source document in question was still in your possession. The quantity of transfer, the receiver, the objective of the payment, and the transaction date is present in detail in a source document.
The following are some common source documents examples:
- Cancelled cheques
- Invoices
- Recipients from the cash register
- Receipts created by computers
- For a customer refund, create a credit memo.
- Timesheets for employees
- Slips of paper
- Orders for goods
Source Documents: Controls
Several safeguards are present to limit the risk of source documents not being correctly recorded in an accounting system. Pre-numbering papers are one of the most used controls, as it makes it easier to locate lost documents. Another check is to compare account balances to accompanying source documents to see if any missing papers have been recorded or if any activities in the accounts appear to be missing supporting source documents.
Originals vs Photocopies
Photocopies of source documents are legally allowed in most cases. Photocopies of invoices are useful and readable, including all of the data obtained on the original. It provides that data in a format that is completely identical to the scanning process' limitations.
A materials invoice listing the goods bought and the fee paid but not including the supplier's identity would not suffice. A document that included all of the data from the original receipt but was reworded in Word or Excel form would likewise be ineligible.
Many companies and government entities reproduce original documents that are fully readable and in the correct manner. Other organisations, on the other hand, may add to these standards. If you plan to digitise accounting or legal papers to make storage easier, ensure the relevant organisation will recognise the records in your intended format.
Types of Source Documents
The source document you must keep depends on the particular transaction you're attempting to verify. There are specialised source documents for accounting, just as various source documents for financial affairs and companies. These records show that a transaction occurred and that a company provided services or goods.
Quotes
The customer may request quotes from many merchants for the products they wish to purchase. The quotations will be examined, debated, and decided on which seller to buy a product, typically due to the lowest price. You can place an order afterwards when the winning vendor converts the quotation into a sales transaction.
Orders
When a company needs to purchase something, it will fill out an order form.
It could be as simple as an A5 page from a copied textbook or a form provided by the vendor via its online site or catalogue.
Because the purchaser may not know the price while making a purchase, order forms do not always disclose the price.
Dockets for Deliveries
A delivery docket is often included with the goods shipped, sent, or delivered by the vendor.
These will frequently explain the shipments, allowing the buyer to compare them to their order as soon as it arrives.
Invoices for Sales and Purchases
Whenever an item is sold, the vendor will provide a document that contains all of the transaction's details.
If the vendor does not anticipate payment in advance of providing the goods, they will mention their terms of payment on the invoice, i.e., how long the purchaser has till it's time to pay.
For example, you must make payment no later than the last day of the month after the invoice date. The document is entered into the vendor's database as a sales invoice and into the purchaser's database as a purchase invoice.
Notes of Credit and Debit
If a customer chooses not to keep an item and instead returns it to the vendor, the vendor will provide a separate note indicating the amount repaid. This is referred to as a credit note in the provider's accounting system since it decreases the amount owed by the client.
It's called a debit note in the customer's accounting system since it lowers the amount they owe the merchant.
Payment or Remittance Recommendations
When consumers pay their payment, they send remittance advice to the vendor, including the amount paid and the invoice codes produced.
If the fee is paid via online banking, it will be mailed separately with the cheque.
Remittances are frequently printed as a little cut-out portion at the end of the sales/purchase invoice or across the right-hand side.
Cheques
A cheque is a specific banknote that symbolises the money that the client is paying. 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. The cheque should provide the payee's information. If it is left empty, anybody can write it in with their name and deposit the cheque, resulting in the theft of the funds.
Cheques should have the phrases 'not negotiable' written across the top and the written words 'or holder' crossed out (not all cheques have this) so that the cheque must be transferred into the payee's bank account rather than cashed, preventing theft.
Receipts
The vendor can issue an invoice once the consumer has paid their amount. When paying with cash, it's a good idea to have a paper as proof of payment. When you purchase something from a store, you will normally receive a receipt. When a consumer pays with a cheque or cash, the vendor will fill out a bank deposit slip brought to the banker and present it alongside the cheques and funds. The deposit slip will include the actual sum being transferred as well as a split of the cheque and payment amounts. The bank will keep track of the transaction to appear as a received payment on the payor's bank account and as a fee paid on the consumer's financial statements.
Other
Debt or rental contracts with accompanying transaction details that reflect the actual sum owed plus the interest and management costs are examples of other source documents in accounting.
Also Read: What is an Audit Trail and Why Do We Need it?
Importance of Source Documents
The importance of source documents are listed as follows:
Organising Documents
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. Most taxing authorities will expect you to maintain a steady workplace file cabinet for 5 to 7 years.
Preparing for an Audit
The source documents provide important information for the revenue and expenditure you're reporting if your firm audits, so keep your invoices and banking transactions. To ensure the correctness of bank or credit card balance, the auditor must have accessibility to a detailed paper trail of all transactions. This increases transparency and makes the audit operate more seamlessly.
Compliance in the Workplace
The effective management of the source documents is at the forefront when it comes to those components that are required for company compliance. You should keep meticulous records of your compliance with company rules. They may be required if you plan to sell your company or if legal proceedings are initiated against it.
Conclusion
An original report, such as a bill or a cancelled cheque that contains vital facts that will either verify or invalidate a transaction, is referred to as a source document. Digital records are also allowed, so it doesn't become paper document. The kinds of source documents you need to save will vary according to the nature of your firm.
Many regulations require that some source papers be maintained for a certain time. If merely to present evidence in the event of a dispute or to give better customer service, it may be wise to save these records regardless of legislation. For these reasons, a corporation should implement a document disposal policy that strictly regulates the shredding or other forms of destruction of source documents until a set period of time has elapsed.
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