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Source Documents

Audits rely heavily on these records to assess the accuracy of an organization’s financial health. Although generative AI has made it easier to build proof-of-concept document processing solutions, the journey from proof of concept to production remains fraught with challenges. What works in a demo with a handful of documents often breaks down when processing thousands of documents daily in a production environment. Digitizing source documents simply means transferring or working with documents in a digital format, such as photos, PDFs, or e-bills. Both digital and physical copies serve essential roles in record-keeping systems.

Source Documents:Definition, Importance and Most Common Types

• Source documents are internal documents that provide concrete evidence of business transactions.
• They are the primary source documents for sales and similar forms of income.
• Examples of source documents abound in the business world, ranging from receipts, bills, and invoices to checks and statements.

Linking entries back to specific documents allows for easier identification and correction of errors if the books do not balance, contributing to dependable financial reports. It can also be electronic, such as an electronic record of the hours worked by an employee, as entered into a company’s timekeeping system through a smartphone. Source documents exist to provide conclusive evidence of a transaction, otherwise known as an “audit trail”.

Why Are Source Documents Important in Accounting and Finance?

The verification of accounting source documents is a meticulous process that auditors undertake to ensure the authenticity and accuracy of financial records. This involves cross-referencing documents against each other and against recorded transactions in the accounting system. For example, auditors may compare payment receipts against bank withdrawals to confirm that expenses have been paid and recorded correctly. They may also inspect payroll records against timekeeping systems to validate the accuracy of wages paid to employees. Source documents are internal documents that provide concrete evidence of business transactions. Often referred to as the paperwork needed for financial statements, source documents create a meticulous paper trail for every financial transaction, ensuring that every penny is accounted for.

• On the other hand, the buyer uses the same invoice to record an expense, an inventory purchase or a fixed asset purchase.
• Most tax departments will require you to maintain agood office filing system for at least 5 or 7 years.
• These documents are the bedrock upon which auditors can confirm the existence and accuracy of transactions.
• Examples of source documents are invoice or bill, cash memo, cheque, sales order, purchase order, credit note, petty cash voucher, credit card sales voucher, etc.

What are source documents…and why does my business need them?

They are the original records containing details that substantiate business events entered into an accounting system, whether as physical paper or in a traceable electronic format. There are a number of possible controls that can be used to reduce the risk that source documents are not properly recorded in an accounting system. One of the more common controls is to pre-number documents, so that missing documents are easier to track down. With no source documents to match transactions in reconciled statements, there may not be sufficient documentation to satisfy auditors, which can cause serious problems for your clients. The bank statements are used as reference by accountants when doing periodic reconciliations of company checking accounts with the bank. They source documents are traditionally sent by the bank as printed forms in the company’s mailbox.

How to Collect, Manage, and Store Source Documents

Source documents are critical to auditors, who use them as evidence that recorded transactions actually occurred. Attorneys may also need access to source documents, in order to bolster their positions on various issues involving litigation. A source document is also used by companies as proof when dealing with their business partners, usually in regard to a payments. Advanced verification techniques include the use of digital signatures and watermarking to confirm the authenticity of electronic documents. These technologies help prevent tampering and provide a secure means of verifying that the documents have not been altered since their creation.

Do I need to store the originals, or can I make digital copies?

If the cash payment is made out of a petty cash fund, the Petty Cash Voucher is used. A Petty Cash Fund is a cash fund established by a company for the payment of smaller expenses and is kept under the custody of a trusted petty cash custodian. A Cash Receipt is issued when the seller receives cash or check from the buyer upfront for the sale of products or services. It serves as an acknowledgement by the seller for receiving cash or check payments from the buyer. Below are some of the source documents that are used by businesses on a regular basis. Other documents that are not mentioned can also be used by your company depending on the nature of your business and industry.

Storage of Physical Documents

This document gives the buyer’s accounting department an objective and reliable record of the purchase transaction. It also gives the vendor a document that can used to record the sale of goods. Ultimately, the goal is to create a system where documents are stored in an orderly fashion, whether in physical or electronic form. This facilitates easy retrieval and ensures thorough documentation of all financial transactions, offering a transparent record of business activities. 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.

Sometimes, you may notice a barcode that is printed at the bottom of the cash register receipt. This usually serves as a lookup of the transaction for when a customer returns an item or for transaction validation purposes. A Source Document is an original record that serves as an evidence of a transaction or event that has occurred in a company during an accounting period. These documents get their name from the fact that they are the origin of the information that is recorded into the accounting books. For example, the manufacturing department issues a purchase requisition for the goods it needs to complete its upcoming jobs. The purchase requisition is sent to the purchasing department for approval.

In American English, the word check is used while in British English and many places outside the United States, the word cheque is mostly used. Most tax departments will require you to maintain agood office filing system for at least 5 or 7 years. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs.

The next step in the accounting cycle is to take the data from the source documents and use this to record a journal entry. Contracts are formal agreements between two or more parties that outline the terms and conditions of a business arrangement. They are essential in an audit as they provide the terms that can affect the recognition and measurement of revenue and expenses.