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What Are Source Documents in Accounting?

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 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. Sales workflow documents include sales orders, packing slips, invoices, sales receipts, and bank deposit slips. They’re all crucial documents for creating a paper trail for your company’s transactions. When properly organized and maintained, source documents will provide you with a paper trail for all of your transactions and serve as records in case of an audit or a need to prove business compliance.

  • Examples of source documents are cancelled checks, credit memos, deposit slips, expense reports, invoices, material requisition forms, purchase orders, time cards, and sales receipts.
  • All of the paperwork needed to create a company’s financial statements are known as source documents.
  • This enhances transparency and ensures that the audit will run more smoothly.

Businesses often base how long they keep files on the length of the statute of limitations for breach of contract or fiduciary duty, and professional liability claims. There are a few things to consider when using source documents, which include how they’re stored, the formats that are acceptable, and how long the documents should be retained. Having source documents readily available will make the reconciliation process easier and more accurate. It’ll also help to gather clean data that can be translated into business insights. If your business has employees, maintain copies of their timesheets and expense reports as a backup in case there’s ever a question about the accuracy of a transaction. Often, businesses will bill their clients for time or expenses that were incurred by their employees.

Bank statement

This slip, which is always an external document, breaks down the total amount being deposited and shows the amounts of checks and cash. This internal document generated by the vendor allows companies wave financial to keep track of the orders they fulfill. Recording sales orders is an important part of the sales process as it documents the reduction of inventory or materials available for future sales.

  • There is a primary reason why source papers are crucial to the bookkeeping and accounting process.
  • Most taxing authorities will expect you to maintain a steady workplace file cabinet for 5 to 7 years.
  • When a business delivers goods or provides services and allows the purchaser time to pay (in other words, makes a credit sale) it will issue an invoice.
  • 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.
  • 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.
  • 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.

Without this information to back up your business transactions, your accountant doesn’t have the full financial picture needed to prove that you earned every bit of your tax refund or qualify for a small business loan. A supplier invoice is a source document that supports the issuance of a cash, check, or electronic payment to a supplier. A supplier invoice also supports the recordation of an expense, inventory item, or fixed asset in the buying entity’s accounting system. Lockbox check images support the recordation of cash receipts from customers.

Deposit Slip

Follow Khatabook for the latest updates, articles, and news blogs related to medium, small, and micro-businesses (MSMEs), business tips, income tax, GST, salary, and accounting. Source documents are the physical basis upon which business transactions are recorded. 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. They usually contain a description of a business transaction, the date of the transaction, a specific amount of money, and an authorizing signature.

He has a CPA license in the Philippines and a BS in Accountancy graduate at Silliman University. A timesheet is a data table that an employer can use to track the time that a particular employee has worked during a certain period. Businesses use timesheets to record time spent on tasks, clients, or projects.

Originals vs Photocopies

These days, these documents may be in a traceable electronic form rather than a physical hard copy. You would keep source documents for your business just like you keep receipts for tax-deductible items for your taxes. If your taxes are audited, the source documents provide the proof that you’ve made those purchases. The same holds for your business, but in business, you keep original documents for every financial transaction, not just charitable donations. Each time a company makes a financial transaction, it generates some paper trail.

Good bookkeeping software will generate these source documents for you as you progress through the sales process. See our guide of the best small business accounting software to find one that’s right for your business. In accounting, a “source document” refers to any document that substantiates and evidences a transaction. It’s important to retain and organize these documents to research problems or questions that arise concerning transactions. You also might need to provide these to the IRS if it audits you or questions anything related to your tax return.

A check from a cash register

Basically, these documents substantiate the business transaction, whose entry is made in the books, as they are the first and foremost input to the accounting process. In this case, the cheque and the receipt are the source documents, i.e., evidence that such a transaction has taken place. A source document is created when a transaction or event is happening or is done. It shows all the facts of the transaction such as the amount of the transaction, with whom the transaction was made and the date of the transaction. The effective management of the source documents is at the forefront when it comes to those components that are required for company compliance.

What is Source Documents?

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Also, another entry reversing the payment will have to be made in Acme’s books. This ensures that Maiden is once again shown as still owing the money due for the 5,000 CDs.

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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. If you are audited, these source documents will be vital to support your position and to defend yourself in a tax dispute. “Source document” is a term used in the accounting world to mean the original document that contains the details of a business or financial transaction. It typically has information about the names of the parties involved, the amount paid (if any), the purpose of the transaction, and the date. Source documents often have a unique number assigned to them, so that they can be easily identified within an accounting or software system.