Source Documents Overview

Every time a business is involved in a financial transaction, a paper trail is generated. This paper trail is referred to as a source document. Whether checks are written to be paid out, sales are made to generate receipts, billing invoices are sent by suppliers, work hours are recorded on an employee’s time sheet – all the respective documents are its source documents.

 

source documents

 

The 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 and may be an electronic form of confirmation.

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, source documents generally consist of 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
  • Computer-generated receipt
  • Credit memo
  • Employee time cards
  • Deposit slip
  • Purchase order

 

Storing source documents

Any information generated through source documents should be properly recorded in either the company’s journal, accounting software, or financial books. After initial recording, all documents should be preserved and organized into a file and put into a system so it 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

The majority of the time, 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.

 

Additional resources

Below are several additional free CFI resources to help you on your path to advance your career.