What are source document and of what importance are they to the success of your business?
Each time a company makes a financial transaction, some sort of paper trail is generated. That paper trail is called a source document. If a small business writes a check out of its checking account for office supplies, for example, the source documents are the check and the office supplies receipt.
A source document is the original record containing the details to substantiate a transaction entered in an accounting system. For example, a company’s source document for the recording of merchandise purchased is the supplier’s invoice supported by the company’s purchase order and receiving ticket.
In the context of accounting, a “source document” is any form of paper record that is produced as a direct consequence of a financial transaction, and as a result, is evidence that the transaction has taken place.
Why Source Documents Are Important
The source document is essential to the bookkeeping and accounting process as it is the evidence that a financial transaction occurred.
If a company is audited, source documents back up the accounting journals and general ledger as an indisputable audit trail.
Keeping a source document for a business is just like keeping receipts for tax-deductible items for your personal taxes. If your taxes are audited, they provide the proof that you’ve made those purchases. The same is true for your business, but in business you don’t keep receipts only for tax deductible expenses. You keep original documents for every financial transaction.
What Source Documents Provide
A source document describes all the basic facts of the transaction, such as the amount of the transaction, to whom the transaction was made, the purpose of the transaction, and the transaction date .Here are a few examples of common source documents:
- canceled check
- cash register receipt
- computer-generated receipt
- credit memo for a customer refund
- employee time card
- deposit slip
- purchase order
- Bank Statements
- Cheque and Cheque Stubs
- Cash Register Roll
- Goods Received Notes
How to Treat Source Documents
The source document should be recorded in the appropriate accounting journal as soon as possible after the transaction. After recording, all source documents should be filed away in some sort of system where they can be retrieved if and when they are needed.
In certain instances, it may even be important to provide the chain of custody — to be able to determine that the source document in question remained in your control.
Source Documents vs. Photocopies
In most circumstances, photocopies of source documents are legally acceptable. The tax authorities, for example, accept photocopies of receipts, vouchers and others, so long as they are legible, contain all the information present in the original and, within the limits of the scanning process, present that information in a format identical to the original. 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 been retyped in Word or Excel format would also not qualify.
The tax authorities’ standard — complete, legible and an accurate reproduction of the original — is the same standard used in many businesses and government agencies.
Source document help businesses to maintain proper records which are accurate thereby making it possible to produce timely information to make good decision.