Many businesses and government agencies also use the IRS standard of complete, legible, and accurate reproductions of original documents. 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.
There are different methods to record timesheets, such as paper, spreadsheet software, and online time tracking software. When a business sells goods on credit, it will issue an invoice to the purchaser. The same document in the hands of the buyer of the goods is called a purchase invoice. Many businesses and government agencies also use the IRS standard of complete, legible, and accurate reproductions of the original documents. This is a written document issued by one person to another, to acknowledge that money or valuable property has been received.
Why Are Source Documents Important?
It’s provided only after the goods have been transferred or services have been rendered and the client has paid in full. Sales receipts are internal documents for sellers and external documents for buyers. The type of source document you should retain varies with the type of transaction you need to substantiate. Just as there are different source documents for personal finances and business, there are specific source documents for accounting. These documents prove not only that a transaction took place but also that a business rendered goods or services.
Every business transaction whether cash transaction or credit transaction must be supported (or evidenced) by a source document. The source documents are the original documents on which information about the transactions are recorded. It follows therefore that accounting records can only be verified when the appropriate source documents are available to do so. Each time a company makes a financial transaction, it generates some paper trail.
Accounting 101: Basic Terminologies, Accounting Cycle & More
Documents generated within the past year are generally stored on-site, with older documents being stored in less expensive off-site storage facilities. A credit card statement is a summary of how you used your credit card during a billing period. The summary includes your payments, credits, purchases, cash advances, balance transfers, fees, interest charges, and amounts past due. Your bank account statement is an essential document because it helps you compare the bank’s records with your own. By reconciling your account statement each month, you’ll be able to identify and resolve any discrepancies and ensure that your accounting is accurate.
- Aside from that, you’ll need source documents to present during an IRS audit.
- The type of source document you should retain varies with the type of transaction you need to substantiate.
- In accounting, a “source document” refers to any document that substantiates and evidences a transaction.
- You should document your compliance with internal requirements closely with company records.
- When this happens, the numbers in their ledger don’t line up with the account statement.
- 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 under your control.
A source document is the original document that contains the details of a business transaction. A source document captures the key information about a transaction, such as the names of the parties involved, amounts paid (if any), the date, and the substance of the transaction. Source documents are frequently identified with a unique number, so that they can be differentiated in the accounting system.
Business Compliance
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. A petty cash log is where you record petty cash expenditures and is part of a manual record-keeping system. There are two primary types of entries in a petty cash log—a debit to record cash and a credit to reflect a cash withdrawal from the petty cash fund. These credits can be for such transactions as payment for office supplies, meals, or stamps. Checks should always include the name of the payee, date, amount paid, and an authorized signature.
- It’s important to devise an organized filing system to ensure your supporting paperwork is available for reference.
- This slip, which is always an external document, breaks down the total amount being deposited and shows the amounts of checks and cash.
- Your bank account statement is an essential document because it helps you compare the bank’s records with your own.
- No, a journal entry is the official way of recording transactions in the books.
- In most circumstances, photocopies of source documents are legally acceptable.
In addition, to avoid treating the payments to your employees as income, the employee should document the date and purpose of the expense, and the employer must reimburse the exact amount. 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. These documents serve as proof and can be attached to invoices that are sent to the client. This internal document generated by the vendor allows companies to keep track of the orders they fulfill.
Why Source Documents in Accounting Are Important
When goods are sold for cash, the customer is usually provided with a receipt. 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 had been retyped in Word or Excel format would also not qualify. This is all the information needed to create an accurate accounting entry. This is the standard form required to be filled in duplicate or triplicate whenever cash cheques, bank drafts etc. is being paid into an account maintained with the bank.
It’s important to reconcile your credit card statement to ensure that you haven’t missed any fraudulent charges, and it can serve as evidence that a particular purchase was made. It contains details about the sale, including the quantity and price of any goods or services exchanged, delivery date, delivery address, and payment method. A cheque is a written order made by a customer to the bank to pay a stated sum of money to the person or business named on the cheque. When cheques are issued to make payment, the cheque itself or its counterfoil (or stub) would serve as the source document for the payment. The Internal Revenue Service mandates retention intervals for some types of documents related to payroll. If there is any question regarding the retention period for a document, consult with a knowledgeable attorney.
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst. Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you.
You might need them if you decide to sell your business or if legal action is taken against your business. It’s essential that the auditor has access to a clear paper trail of all transactions to confirm the accuracy of bank and credit card balances. This enhances transparency and ensures that the audit will run more smoothly. A packing slip is an internal document that includes a complete list of items included in a package.
In addition to a source documents invoice, there are many other forms that this evidence might take. For evidentiary purposes, electronic images of source documents are generally acceptable, though paper-based documentation may still be required in some cases. It’ll also show your new balance, available credit, and the last day of the billing period.
The pre-numbering of documents is particularly useful, since it allows a company to investigate whether any documents are missing. Aside from that, you’ll need source documents to present during an IRS audit. In most cases, photocopies of source documents are acceptable legally, which means source documents can be stored electronically and the originals destroyed. The IRS has accepted photocopies of receipts since 1997—as long as they’re legible and contain all of the information present in the original. Source documents can be helpful to ensure that your accounting data is accurate.
When you make a deposit of cash or checks at the bank, you’ll receive a slip to prove it. This slip, which is always an external document, breaks down the total amount being deposited and shows the amounts of checks and cash. 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.
Ideally, you’ll avoid entering transactions directly from a bank statement and instead enter them from a source document. If your business regularly purchases inventory to be sold, then you’ll process POs. These internal documents detail the dates and amounts of your purchase so that you can manage your expenses. Sometimes, the supplier will issue this document to you, or you can create it yourself. After the PO is approved, the vendor will begin the order fulfillment process and return an invoice. In its most basic form, it acknowledges that a seller has been paid for goods or services.
.css-g8fzscpadding:0;margin:0;font-weight:700;How long should you hold onto source documents?
It’s important to record any information that’s generated through source documents in either your company’s journal, accounting software, or financial books. After the document has been recorded, it should be organized in a file so that it can be retrieved at any time. Ideally, you’ll also keep a record of internal control procedures that specifies who in your company can access and authorize payments, orders, and other transactions. Any information generated through source documents should be properly recorded in either the company’s journal, accounting software, or financial books.
You also might need to provide these to the IRS if it audits you or questions anything related to your tax return. The source document’s information 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 system where they can be retrieved if and when 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 under your control.
Examples of source documents are cancelled checks, credit memos, deposit slips, expense reports, invoices, material requisition forms, purchase orders, time cards, and sales receipts. There are a few general accounting source documents that are important to retain for your records. These include your bank and credit card account statements, copies of your cleared checks, a petty cash log, and receipts. A Source Document is the root document that bears the essential information related to the business transaction. When a business transaction takes place, a piece of written, printed, typed or electronic trail is generated which stores data relating to the transaction and acts as a formal or official record. 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.
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. Eric Gerard Ruiz is an accounting and bookkeeping expert for Fit Small Business. He completed a Bachelor of Science degree in Accountancy at Silliman University in Dumaguete City, Philippines. Before joining FSB, Eric has worked as a freelance content writer with various digital marketing agencies in Australia, the United States, and the Philippines. GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.
