Every time there is a financial transaction in a business, a trail of paper is generated. That trail is considered as the source document in accounting. However, there are misconceptions regarding the concept. To steer clear of them, read the article ahead…
Think of a situation when we sell goods to customers, we prepare invoices for sending goods, bills receivable in case of credit sales, and cash memos in case of cash sales. The copy is delivered to the customer, and the original is retained as a record in the business. The copy that is retained is the source document in accounting. To dive deep into the topic, read ahead..
A Source Document is the root document that bears the essential information related to the business transaction. When a business transaction takes place, a piece of written, printed, typed or electronic trail is generated which stores data relating to the transaction and acts as a formal or official record. This document is the source document. Source documents are typically retained for use as evidence when auditors later review a company’s financial statements, and need to verify that transactions have, in fact, occurred.
Every business transaction whether cash transaction or credit transaction must be supported (or evidenced) by a source document. The source documents are the original documents on which information about the transactions are recorded. It follows therefore that accounting records can only be verified when the appropriate source documents are available to do so.
Numerous documents can show a transaction—big or small. While a receipt may be an obvious example, some aren’t so much. To give you a better idea of what you need to be on the lookout for, we’ve created a list of some of the most types of source documents. A few examples include-
This is a written document issued by one person to another, to acknowledge that money or valuable property has been received. When goods are sold for cash, the customer is usually provided with a receipt.
An invoice is a business document prepared when goods are sold. It is normally sent by the seller of the goods to the buyer. When a business sells goods on credit, it will issue an invoice to the purchaser. To the seller of the goods, the copy of the invoice is a sales invoice. The same document in the hands of the buyer of the goods is called a purchase invoice.
A cheque is a written order made by a customer to the bank to pay a stated sum of money to the person or business named on the cheque. When cheques are issued to make payment, the cheque itself or its counterfoil (or stub) would serve as the source document for the payment.
This is the standard form required to be filled in duplicate or triplicate whenever cash cheques, bank drafts etc. is being paid into an account maintained with the bank.
Now that you know what they are, it is time to discuss the importance of source documents in accounting. Your source documents affect many aspects of the accounting and bookkeeping process. When you carefully organize and maintain them, they provide you with an easy paper trail. They show all of the information you need to enter them into a ledger. This data includes the date of the transaction, the amount, the recipient, and a description. Your accountant can then accurately input all of the information into your financial statements. Source documents are important because of the following reasons-
Whether the government found discrepancies in your taxes or it’s just a routine audit, your source documents serve as evidence for your purchase. Without them, you could find yourself in trouble. If you do have them but don’t organize them, this can still cause issues. Nothing is more stressful than scrambling to find a receipt from two years ago while trying to run a business.
Bank statements do not update immediately, and businesses sometimes forget to record credits and debits. When this happens, the numbers in their ledger don’t line up with the account statement. It can be a chore to track down the problem when your statement doesn’t show an accurate description of the transaction. However, you can create a more efficient system when you have all of your source documents.
We understand that organizing all of the different types of source documents is overwhelming at best. For that reason, we recommend that you use an IDP platform such as VisionERA to organize, and capture business critical information from heaps of documents. From invoices to receipts, VisionERA IDP can handle all.
Enhanced with capabilities such as-
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