Source Documents (in Accounting): Why Are They Important?
Your business could have thousands of source documents, and you don’t even realize it. Many new business owners don’t understand the definition of a source document, and as a result, they do not manage them properly. Sometimes, they get discarded. Other times, they get forgotten.
When this happens, you could find yourself missing out on valuable tax deductions. Poor organization of your financial documents can also cause you to overspend. Worst of all, it could put you at risk during an IRS audit. Though it seems like a tedious task, it is important that you learn about source documents and how to manage them.
Source documents play an integral role in your business’ accounting strategy, finance management, and tax reports. To make sure that you record all of your transactions, you need to keep track of any source documents. In this article, we’re going to explore:
- The Definition and Examples
- Their Role in Accounting
- Business Documents
- The Importance of Documentation
- And More!
Source Document Definition: What Is a Source Document?
You can’t keep something if you don’t know what it is. Therefore, we must first uncover its definition. In general, a source document is anything that shows a business transaction. It isn’t limited to expenses, however. Each time you spend or receive money, you create a source document. If we dig into the definition a little more, you will better understand which source documents are involved in your business.
A source document is an original document containing essential details that can support or substantiate a transaction. Specifically, the transactions must be entered into an accounting system at some point.
Prior to the digital era, all source documents were printed on paper that could be filed away. Though digital files have made our lives easier in many ways, they can also make it more difficult to find, sort, and store a source document. Fortunately, software and programs, like Wellybox, can help you locate any invoices and receipts in your email. Those aren’t the only types of business paper to consider.
Examples of Source Documents
Numerous documents can show a transaction—big or small. While a receipt may be an obvious example, some aren’t so much. To give you a better idea of what you need to be on the lookout for, we’ve created a list of some of the most common documents:
- Bank Statement: This document is a big one! It helps you compare your own records with the bank so that you can spot and resolve any discrepancies. It also happens to be one of the easiest to obtain. You may get one by mail or email, and you can even request them from your bank at any time.
- Deposit Slips: Whether you deposited a check or cash, you are sure to get a slip to prove it. When you do, make sure you keep it in your records to verify all of your income later.
- Sales Receipt: A receipt is a source document for petty cash book updates. They help you keep your statement accurate, and they ensure that you reimburse your employees.
- Packing Slip: Anytime you ship a product to a customer, the packing slip proves that the purchase took place and was fulfilled.
- Expense Reports: We’ve covered expense reports before, so you should be familiar with them. If you track your purchases daily or weekly, you should organize all of those reports and provide them to your accounting team.
- Purchase Orders: If your business regularly purchases inventory to be sold, you should have plenty of purchase orders. These documents detail the dates and amounts of your purchase so that you can manage your expenses.
While these items occur most often, business paper isn’t limited to the items on the list. In fact, they can vary greatly depending on the size and nature of your business. You can work with an accountant to determine which documents are most crucial for your company.
Source Documents in Accounting: What Are They?
Just as there are different source documents for personal finances and business, there are specific source documents for accounting. These documents not only show that an economic transaction took place, but they also prove a business rendered goods or services. In accounting, we categorize these two types of source documents as either internal or external.
Internal source documents in accounting are created and used within your business. They are often used to make decisions about different aspects of your company. The data in such documents help forecast, set pricing, and maintain accurate financial records.
This business paper comes from an outside company. Since they prove that your company completed a transaction with another business, they are often considered more important in the accounting world. These are the types of documents that help prepare your taxes.
Still wondering, “what are source documents in accounting?” If so, we’ve got you covered. A few different source documents include:
- Invoice for Sales of Goods
- Leases and Contracts
- Payroll Lists
- Bank Documents
- Accounting Notes
- Credit Memos
Business Source Documents
As we mentioned before, the paper can vary widely depending on the nature of your business. For example, a freelance architect may have many invoices and receipts, but they probably have fewer purchase orders than a grocery store. You must identify which source documents pertain to your business so that you can organize them.
We strongly recommend that companies keep any checks that they may write or receive. While you might think that it is safe to toss a canceled check, you need to store those as well. Having all of these documents will make the bank reconciliation process much simpler.
Many businesses also deal with time cards. They provide evidence of employee payment regardless of whether it was issued via a check or direct deposit. Other companies may bill customers directly for an employee’s hours. In these instances, the time card supports any customer invoices.
Why Are Source Documents Important?
Now that you know what they are, it is time to discuss the importance of source documents in accounting. Your source documents affect many aspects of the accounting and bookkeeping process. When you carefully organize and maintain them, they provide you with an easy paper trail. They show all of the information you need to enter them into a ledger. This data includes the date of the transaction, the amount, the recipient, and a description. Your accountant can then accurately input all of the information into your financial statements.
Simplified Audit Preparation
Whether the government found discrepancies in your taxes or it’s just a routine audit, your source documents serve as evidence for your purchase. Without them, you could find yourself in trouble. If you do have them but don’t organize them, this can still cause issues. Nothing is more stressful than scrambling to find a receipt from two years ago while trying to run a business.
More Efficient Bank Reconciliation:
Bank statements do not update immediately, and businesses sometimes forget to record credits and debits. When this happens, the numbers in their ledger don’t line up with the account statement. It can be a chore to track down the problem when your statement doesn’t show an accurate description of the transaction. However, you can create a more efficient system when you have all of your source documents.
Organize Your Source Documents Today
We understand that organizing all of the different types of source documents is overwhelming at best. For that reason, we recommend that you use various tools to help you maintain them. If you are looking for a simple way to organize your digital and paper receipts, invoices, and more, then you should consider an expense tracker like Wellybox.
There are also many other apps and programs available to assist you in the process. If you would like to learn more about them, we encourage you to visit our website. We would be happy to provide you with more information on source document organization