Accounting paper trail
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What are Source Documents?
Every time a business is involved in a financial transaction, a paper trail is generated. This paper trail is referred to in accounting as source documents. Whether checks are written to be paid out, sales are made to generate receipts, billing invoices are sent by suppliers, or work hours are recorded on an employee’s timesheet – all the respective documents are source documents.
Importance of Source Documents
Source documents are, first and foremost, important to the bookkeeping and accounting process because they serve as physical evidence that a financial transaction actually occurred. Nowadays, these documents do not necessarily need to be a physical hard copy – they may be in a traceable electronic form.
In addition, source documents are also essential in the auditing process. When companies undergo an audit, the auditor’s access to a clear and accessible paper trail of all transactions enhances the overall legitimacy and independence of the audit. In order to reaffirm the accuracy of the company’s balances in individual accounts, auditors need full access to all the documents. Overall, to run a business more smoothly and enhance transparency, all its source documents should be kept and stored for future reference.
Common Types of Source Documents
In its simplest form, a source document generally contains the following information:
- The date of the transaction
- The total amount of the transaction
- A description of the transaction
- One or more authorizing signatures
The most common documents are:
- Checks
- Invoices
- Receipts
- Credit memos
- Employee time cards
- Deposit slips
- Purchase orders
Document Storage
Any information generated through source documents should be properly recorded in either the company’s journal, accounting software, or financial books. After the initial recording, all documents should be preserved and organized into a file and put into a system so they can be retrieved at any time. It is also important to make a record of general internal control procedures specifying who in the firm can access and authorize payments, orders, and other transactions.
Originality of Source Documents
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.
Similarly, the Canadian Revenue Agency (CRA) accepts scanned documents as long as the records are produced and retained in paper format or stored in an electronically accessible and readable format. Although organizing and filing these documents can be tedious, putting in the extra time to properly maintain a paper trail and create an easy way to access these documents can result in huge time savings in the future, and also ensures greater transparency.
More Resources
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To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:
FAQs
Typical source documents include sales invoices, cash receipts, cash register slip, credit notes and deposit slip.
What are the 5 importances of source documents? ›
Source documents – such as invoices and purchase orders – can be used to document each sale. These documents can be used to monitor your business' progress, prepare financial statements, identify the source of receipts, track deductible expenses, prepare tax returns, and support items reported on your tax returns.
What are source documents PDF? ›
Source documents are the physical basis upon which business transactions are recorded. They usually contain: a description of a business transaction the date of the transaction a specific amount of money There may also be an authorizing signature.
What are three examples of transaction source documents? ›
The three examples of transaction source documents are:
- Timecard.
- Bank statement.
- Sales order.
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.
What is considered a source document? ›
In the accounting industry, source documents include receipts, bills, invoices, statements, checks – i.e., anything that documents a transaction. Any time a business spends or receives money, a source document is created. Source documents are an integral part of the accounting and bookkeeping process.
What are the three ways to document a source? ›
How does one cite a source?
- For books: author, title, place of publication, publisher, and publication year.
- For articles: author, title of article, title of journal, volume, issue, date, page numbers, and doi or permalink.
- For web page resources: author, title of page, Web address or URL, and date of access.
These source documents include vouchers, cash memo, invoice, sales bill, cheques, receipts, salary slip etc.
What makes a good source document? ›
A good source document should describe the basic facts of the transaction such as the date, the amount, the purpose, and all parties involved in the transaction. Some examples of source documents include: Bank Statements. Payroll Reports.
Is a cash book a source document? ›
Is a Cash Book a Source Document? Yes, cash register sales receipts count as a source document.
A source document, such as a sales slip, a check, a bill, or a cash register tape provides evidence of the transaction. 2. Transfer the journal information to the ledger (book of accounts).
Is a journal a source document? ›
In general, everything starts from a source document and then moves to a journal. In the accounting world, the journal is a book that contains original entries for financial transactions. Journals store financial transaction information ultimately derived from source documents.
What are the three core financial documents? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What are six steps in the accounting cycle? ›
The steps in the accounting cycle are identifying transactions, recording transactions in a journal, posting the transactions, preparing the unadjusted trial balance, analyzing the worksheet, adjusting journal entry discrepancies, preparing a financial statement, and closing the books.
Is an invoice a source document? ›
An invoice is a source document that shows all details of the sale, including payment terms. These details are entered as a sales invoice by the seller, and a purchase invoice by the buyer.
How many types of source documents are there? ›
There are different types of source documents. A few of them are delivery dockets, receipts, deposit slips, delivery dockets, orders, and quotes.
How many different types of documentation types are there? ›
The four kinds of documentation are: learning-oriented tutorials. goal-oriented how-to guides. understanding-oriented discussions.
Which documents are primary sources? ›
Primary sources may include but are not limited to: letters, manuscripts, diaries, journals, newspapers, maps, speeches, interviews, documents produced by government agencies, photographs, audio or video recordings, born-digital items (e.g. emails), research data, and objects or artifacts (such as works of art or ...
