Source Documents

Source documents are original records that include the information supporting or substantiating business transactions recorded in the accounting system. They offer tangible proof that a transaction occurred. Moreover, they serve as evidence for tax preparation and audit procedures, thus streamlining operations and improving transparency.

Previously, businesses stored such a document as a physical hard copy. That said, they may store these documents electronically with a date and timestamp for reference. There are different types of source documents. A few of them are delivery dockets, receipts, deposit slips, delivery dockets, orders, and quotes.

• Source documents meaning refer to an activity trail or original records that support the ledger accounts and journals during an economic or tax audit. They streamline the audit procedures by increasing transparency.
• Some source documents are quotes, invoices, orders, delivery dockets, and receipts.
• There are various benefits of source documents in accounting. For example, they minimize the input of inaccurate details in books of accounts and reduce the possibility of fraud.
• The details typically included in source documents are the transaction date, the transaction's overall value, authorizing signatures, and the explanation of the deal.

Source documents meaning refer to internal documents containing crucial details regarding business transactions. They prove that the recorded financial transactions occurred and are thus essential for the accounting methods. Moreover, these documents are crucial for auditing procedures. Since the paper trail of all transactions is easily available to auditors, it enhances the audit's validity and objectivity.

A source document usually includes the following details:

• The total value of a transaction
• Date of the transaction
• The deal's explanation

Moreover, such documents include one or multiple authorizing signatures.

One must note that producing the original documents is not always mandatory. For example, per The Internal Revenue Service or IRS, photocopies of the documents are legally acceptable. However, the photocopies must be an accurate representation of the real documents. Moreover, they must be legible and complete.

Most accountants, bookkeeping service providers, and lawyers recommend keeping these documents for 5 to 7 years. Whereas, per IRS, small organizations must preserve all documents substantiating income, credits, and deductions until that specific year's statute of limitations runs out. Depending on the business's tax status, this may take 3 to 7 years.

Businesses can take the following measures to file and monitor source documents in accounting while ensuring that they are accessible:

• Assign a prefix number to every document. This will help one find any misplaced documents.
• Arrange all documents by category or alphabetically to retrieve them easily.
• Check whether the recorded account balances were reconciled with the relevant documents.
• Utilize an automated file system to simplify reconciling and tracking.

Let us look at some uses of source documents.

• Businesses use them to prepare books of accounts.
• They help in auditing procedures by increasing transparency.
• One can use them to acquire authorization for any amount paid.
• They are tangible evidence of a business transaction.
• Businesses can utilize these documents to reconcile accounts.
• Such a document can prove that a business owns a certain property.
• Organizations can use them to rectify an undercharge or overcharge made in a customer's account.

Some of the different types of source documents are as follows:

• Delivery Dockets: In most cases, these documents include a description of the goods delivered, enabling customers to compare them with their order after receiving them.
• Deposit Slip: When customers pay using cash or check, the seller prepares a bank deposit slip and presents it to the bank with cash or check. The deposit slip includes a breakdown of the check and cash amounts and the overall amount being deposited.
• Quotes: A customer can choose to receive quotes from a seller for the goods they want to purchase. Once the former places an order, the latter converts the document into a sales invoice.
• Receipts: Vendors may give a receipt after the consumers pay the invoice. If the payment is in cash, issuing a receipt to confirm the payment is good practice. Receipts are generally automatically issued when buying goods from an online retailer or a store.
• Sales And Purchase Invoice: Sellers produce a paper mentioning a sale's specifics when they sell an item. For example, they will mention how long the buyer will have to make the full payment or whether paying any amount before the delivery of goods is necessary.
• Orders: Organizations fill out orders if they need to buy something. The order form can be as simple as a page from a duplicate book or one provided by sellers via their catalog or online store. However, since a buyer might not know the cost when placing an order, it is unlikely for the order forms always to include the cost. 

Let us look at a few source document examples to understand the concept better.

Example #1

Suppose Building Dreams, Inc, a construction company, purchased raw materials from its vendor, TBZ, Inc. The latter issued an invoice specifying all details of the sale, including how much time the former has to pay the invoice amount. This invoice is a source document acting as tangible proof that a transaction occurred between the two companies.

Example #2

While auditing Dream tees, an online retailer of t-shirts, the auditors found discrepancies concerning the payments made to vendors. However, the issue was resolved after they checked two key source documents, the company's bank statements, and the purchase invoices. As a result, they served as evidence that the company's financial statements were accurate.

One can understand the importance of these documents by going through these points:

• They increase transparency during an audit by acting as proof of transaction. This, in turn, improves an audit's validity.
• Such documents reduce the input of incorrect details in the business's books of accounts.
• They minimize the chances of fraud in a business.
• The documents can help businesses prepare their financial statements.
• Such documents can help organizations defend themselves in the case of tax-related disputes.

The meaning and purpose of source documents and vouchers can be confusing for a person new to accounting. However, individuals can eliminate confusion by understanding how the two concepts differ. In that regard, knowing their distinct features is crucial. So, let us look at them.

This article has been a guide to what are Source Documents. Here, we explain their examples, types, importance, uses, and differences with vouchers. You may also find some useful articles here -

• Credit Note
• Debit Memo
• Credit Memo