Source Documents

25/04/2020 0 By indiafreenotes

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. The pre-numbering of documents is particularly useful, since it allows a company to investigate whether any documents are missing.

Once the information in a source document has been recorded in the accounting system, the source document is indexed for easy access and archived. Documents generated within the past year are generally stored on-site, with older documents being stored in less expensive off-site storage facilities.

Source documents are critical to auditors, who use them as evidence that recorded transactions actually occurred. A source document is also used by companies as proof when dealing with their business partners, usually in regard to a payments. Examples of source documents are:

  • Cancelled check
  • Credit memo
  • Deposit slip
  • Expense report
  • Invoice
  • Materials requisition form
  • Purchase order
  • Time card
  • Sales receipt

For evidentiary purposes, electronic images of source documents are generally acceptable, though paper-based documentation may still be required in some cases.

It is usually necessary to retain source documents for several years. The Internal Revenue Service mandates retention intervals for some types of documents related to payroll.

Common types of source documents

In its simplest form, a source document generally contains 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
  • Credit memos
  • Employee time cards
  • Deposit slips
  • Purchase orders

Document Storage

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

Some of the important types of Documents Used in Accounting are as follows:

1. Cash Memo:

Sales and purchases are the main features of any business enterprise. For recording cash sales and cash purchases, cash memos serve as source documents. Cash memo is a source document in which all transactions pertaining to cash sales or purchases are to be recorded.

When goods are purchased by a business enterprise on cash basis then the firm receives cash memo and when a business enterprise sells goods, it gives cash memo, in which all details of the transaction relating to the purchase or sales viz. number or quantity purchased/sold, price, discount received or allowed and sales tax collected or deposited are provided. On the basis of cash memos, these transactions are then recorded in the book of accounts. In audit, the foremost duty of the auditor is to verify the cash book with reference to the cash vouchers.

2. Invoice and Bill:

Invoice or bill records the credit transactions related to sale or purchase. This is prepared when a firm purchases or sells the goods on credit. At the time, when the goods are sold by the business enterprise on credit, sales invoice is prepared in which all details of the credit sales viz. the quantity, rate and total amount etc. are mentioned.

Usually, invoices are made in duplicate, the main copy (original) is sent to the purchaser and the another is kept by the business enterprise for record and future reference. Similarly, when goods are purchased on credit, the supplier prepares the invoice in duplicate. When the main copy is received by the purchaser, it becomes a bill.

3. Receipt:

Receipt is an evidence of making the payment on account of any business transaction. This source document is prepared for showing the proof of giving any cash to the party (who receives the cash) on account of any business transaction. At least two copies are made of any receipt.

The original copy is prepared for giving it to the party who makes the payment and another copy is kept for record. The details about the business transaction on account of which the cash is received viz. date, amount, name of the party and the nature of payment etc. are given in this source document.

4. Pay in Slip:

This document serves the purpose of providing an evidence that on particular date, a specific amount has been deposited in the bank. When a depositor deposits money in the bank account, he fills up a form provided by the bank containing the information about the date, amount to be deposited and the name of the depositor etc.

The bank clerk signs, stamps the counterfoil of the pay in slip and returns it to the depositor. Usually, the large business enterprises obtain the complete bunch of pay-in-slips and get them all bound in a book. The counterfoil of the pay in slip becomes a source document, which acts as an evidence for the customer to record this transaction in the books of accounts.

5. Cheque:

A cheque in an unconditional order, drawn upon a specified hanker, signed by the maker, directing the banker to pay on demand a certain sum of money only to the order of a person or the bearer of the instrument. -Negotiable Instruments Act, 1881

A cheque is an instrument drawn upon a banker and payable on demand. The bank issues a booklet containing cheque forms to its account holders. Digits mentioned on the bottom of the cheques denote code of ‘State’, ‘Bank’, ‘Branch’, ‘Cheque’ and ‘Type of Account’ respectively.

Through cheques, payment can be made to a specific person by writing the name of the party after the words ‘Pay’ and by striking off the word ‘bearer’ with a line printed on the cheque. In this case cheque is called an order cheque. To avoid any fraud, cheques are crossed by drawing two parallel transverse lines across the cheque. Sometimes the words ‘& Co’, ‘A/C Payee Only’, ‘Not Negotiable’ or ‘Name of the Bank’ is written within these lines.

6. Debit Note:

A debit note is a document which shows that the business enterprise has raised debit against the party to whom this document is sent in respect of any business transaction other than the credit sale. Business enterprise may make a debit note against the supplier for an amount which is to be recovered from him, when the business enterprise returns some goods which are defective in nature or not as per specifications.

A debit note can also be prepared in case of overpayment to any party. In this document, all details about the date and amount of transaction, the name of the party whose account is debited along with reason for debiting his account are mentioned.

7. Credit Note:

A credit note is a document which shows that the business enterprise has given the credit to the party to whom this document is sent in respect of any business transaction other than credit purchase. When a business enterprise receives back the goods sold earlier then it makes a credit note in favour of the purchaser showing that his account has been credited in the books of business enterprise.

A credit note can also be prepared in case of less payment to any party. In this document, all details about the date and amount of transaction, the name of the party whose account is credited along with reason for crediting his account are mentioned. To distinguish it from a debit note, it is commonly prepared in red ink.

8. Vouchers:

The documents prepared for the purpose of recording business transactions in the books of accounts are known as vouchers. Voucher is prepared on the basis of source documents. For recording business transactions in the books of accounts, source documents are further analyzed and conclusion is drawn as to which account is to be debited and which account is to be credited. The document on which this conclusion is written is known as voucher or accounting voucher.

Features of Voucher:

(i) It is a document.

(ii) It is prepared by analyzing the source documents.

(iii) It contains decision regarding the accounts to be debited and credited.

(iv) It helps in recording an accounting entry in the books of accounts.

(v) It is prepared and signed by the accountant and is also countersigned by the authorized signatory of the business enterprise.

Preparation of Vouchers:

Business transactions in the books of accounts are available in the source documents. These documents are further analysed and conclusion is to be drawn about which account is to be debited and which account is to be credited. After deciding the head of accounts to be debited and credited, vouchers are prepared. Usually, blank forms are readily available in the printed form in the market.

Accounting Vouchers are of two types viz:

(i) Cash Voucher and

(ii) Non Cash Voucher.