Source Documents in Accounting

Source Documents in Accounting

Accountants are required to have a solid understanding of the different methods and standards they need to follow to maintain their high level of professionalism. One important area that an accountant must take into consideration is source documents.

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What are Source Documents?

A source document is essentially an audit trail that accounts for the flow of money and assets as it impacts the financial statements. This is considered a vital source of information for any accountant because it enables the auditors to trace back the source of any errors and mistakes in financial statements. 

Classification of Source Documents 

Source documents can be classified into two categories, internal and external source documents. 

Internal source documents are materials that originate with the organization and are used in the operation of day-to-day transactions. Examples of internal sources of documents include:

  • Accounting reports
  • Payroll data
  • Billed invoices
  • Bank statements
  • General ledgers

External source documents exist outside the company and are used in the operations of day-to-day business transactions. These are usually obtained from third parties like suppliers, customers, and other financial institutions. Examples of external source documents include:

  • Invoices
  • Contracts 
  • Customer deposit slips 
  • Approvals and guarantees 
  • Shipping orders

Types of Source Documents in Accounting                                     

The most typical accounting documents are:

1. Invoices

An Invoice is one of the main source documents from Accounting. This type of source document is very important because it contains the amount that was agreed upon in the sale, along with other information such as taxes and fees, freight costs, commission fees, and end-user information.

2. Receipts

Receipts are very similar to invoices and can be considered a preliminary source document. This type of source document is used to track any payments made on previous invoices, and will not be used as the final receipt unless the funds have already been put into the business bank account. 

3. Checks

This is another source document that is usually used as a preliminary purchase agreement. This type of document will detail the amount of money that is owed and other necessary information. Also, this type of source document should be approved by the bank before it will be submitted for payment. 

4.  Employee time cards

Employee time cards can be used as a record of hours worked as well as how much they are paid. This type of source document is usually used not only for employees in the organization but also for contract workers such as higher-level consultants.

5. Credit memos

Credit memos are used to record the amount of money that is owed to the organization by its credit customers. This would include sales, purchases, and payments made to suppliers. 

6. Deposit slips

Deposit slips are used to record the amount of money deposited into the business bank account. This source document is used to show that a deposit was indeed made, along with the date and time of the deposit.

7. Purchase orders

A purchase order is usually issued by the owner or the Chief Financial Officer (CFO) for supplies and products that can be used for business operations or activities. The purchase order would include information like supplier name, product description, quantity ordered as well as price and other details regarding the proposed purchase order.

Why are Source Documents Important in Accounting?

Source documents come in handy, especially in bookkeeping and accounting. Source documents are applicable in many fields of accounting hence as an accounting student, you should make effort to familiarize yourself with them. The advantages of source documents are:

1. They act as evidence that a transaction took place.

2. They can be used as a form of double checking for any errors that may have been committed by the accountant.

3. They can act as a form of verification for any outside party that needs to review the financial documents.

4. They have the potential to reduce fraud and other illegal activities within an organization. 

5. They can help when there are discrepancies in the financial statements of the company.

6. They provide a record of how much money is owed to the organization by its creditors.

Things to Consider When Using Source Documents

When using source documents there are certain things that you should consider. For example, how long the papers should be kept, how they should be stored, and the permitted file formats.

1. Source document storage

It’s essential to capture all information obtained from sources in either your company’s journal or a separate documents folder. This will help in creating a paper trail to go back to any errors that may have been committed. One thing that you should keep in mind is the size of your company and the space available to store these documents. Generally, you should be able to store a minimum of 2 years’ worth of documents, but companies like banks may require up to 5 years’ worth of information.

2. How long should source documents be kept

Source documents should be kept for at least two years from the date of the relevant transactions. This is usually not a problem for small businesses, but for larger companies, it may quickly get out of hand especially when hired personnel starts to leave.

3. Source document format

Formal source documents usually come in the form of hard copies, but you may also receive source documentation from third-party financial institutions such as banks. To properly store, transport, and file these documents, use the proper document formats so that it doesn’t get damaged or lost in the process of moving them around. To be able to preserve your source documents for a longer period, you should consider hiring a professional company to properly take care of them.

There are so many types of documents that need to be handled daily to maintain a healthy and well-organized business. Although these documents may seem small, they can bring your business to its knees if you don’t handle them properly. It is always best to adhere to the rules and regulations set forth by the government so that you won’t have any issues down the road.