In accounting, “source document” refers to any document that substantiates a transaction. It’s important to retain and organize source documents to be able to research problems or questions that arise concerning transactions. You also might need to provide source documents to the IRS if it audits you or questions anything related to your tax return. Show
Types of Source DocumentsThe 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. They can be classified as either internal or external source documents. InternalInternal source documents are created and used within your business. They’re often used to make decisions about different aspects of your business, such as assisting with forecasting, setting pricing, and maintaining accurate financial records. ExternalThis type of source document originates from an outside company and enables you to prove that your business completed a transaction with another business. They’re useful when preparing your taxes and substantiating transactions if questioned by the IRS. List of Source Documents to RetainThe source documents that you retain depend greatly upon the nature of your business. A freelance landscaper might have many invoices and receipts, but fewer purchase orders than a grocery store. To organize these documents best, you must identify which apply to your business. Sales WorkflowSample invoice The sales workflow includes source documents, such as sales orders, packing slips, invoices, sales receipts, and bank deposit slips. They’re all crucial documents that are important for creating a paper trail for your company’s transactions:
Tip: Good bookkeeping software will generate all of these source documents for you as you progress through the sales process. See our guide, Best Small Business Accounting Software, to find the software right for your business. Purchases / Expense WorkflowSample purchase order (PO) The purchase and expense workflow includes source documents, such as POs and vendor invoices, which are essential for tracking your company’s expenses:
General AccountingSample credit card statement 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:
PayrollSample employee timesheet If your business has employees, you should 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:
Why Source Documents Are ImportantWhen 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. Retaining all source documents allows you to accurately ensure that your books are up to date. All source documents should be stored, either physically or electronically, for future reference. Audit PreparationIf your business is audited, your source documents serve as valuable evidence for the income and expenses that you’re claiming, so it’s important that you save your receipts and deposit slips. 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. Business ComplianceIn considering all of the elements that are essential for business compliance, the successful management of source documents is at the top of the list. You should document your compliance with internal requirements closely with company records. You might need them if you decide to sell your business or if legal action is taken against your business. Accounting Data AccuracySource documents can be helpful to ensure that your accounting data is accurate. They also provide for more efficient bank reconciliation. Ideally, you’ll avoid entering transactions directly from a bank statement and instead enter them from a source document. 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. How To Use Source DocumentsThere 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. Source Document StorageIt’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. Source Document FormatIn 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. Many businesses and government agencies also use the IRS standard of complete, legible, and accurate reproductions of original documents. However, other institutions may add to these general requirements. Length of Time to Retain Source DocumentsGenerally, source documents should be kept as long as they serve a useful purpose or until all legal and regulatory requirements are met. 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. You should always keep receipts, bank statements, invoices, payroll records, and any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return for at least six years. Bottom LineA source document is an original document, such as an invoice or a canceled check, which contains essential details that will either support or substantiate a transaction. It doesn’t have to be a paper document, as electronic records are acceptable too. Depending on the nature of your business, the types of source documents that you need to retain will vary. What is the source document for goods returned by customers?Returned goods are typically accompanied by documentation from the customer, such as a bill of lading and packing slip. The goods should be inspected for possible damage, and a copy of the original sales invoice should confirm the historical sale of the goods.
What is the source document for purchase return?The source document which is used as an evidence in recording transactions into purchase returns journal is the Debit note.
Which document is used when goods are returned?The return must be accompanied by a document called “Return Delivery Note”. Simply, the return delivery note is a form used for stating the detailed information about the goods to be returned to the seller after purchase. The form enables a clear allocation and ensures speedy processing of the returned goods.
What are the source documents in the merchandising business?The source documents used to journalize merchandise purchases include the seller's invoice, the company's purchase order, and a receiving report that verifies the accuracy of the inventory quantities.
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