Source Document

Definition

A Source Document is the original electronic or paper document that evidences the occurrence of a financial transaction in a company. It is the primary record that initiates the accounting process and provides critical evidence of the transaction’s specifics, such as the date, parties involved, amount involved, and nature of the transaction.

Examples

Invoices: Issued by a seller to a buyer to detail the products or services provided and their prices.
Receipts: Acknowledgments from sellers indicating payment received from customers.
Cheques: Written orders from an account holder instructing a bank to pay a specified amount of money to a person or entity.
Contracts: Legal agreements between parties outlining the terms and conditions of transactions.
Purchase Orders: Documents issued by a buyer committing to pay the seller for the acquisition of goods or services.
Bank Statements: Periodic summaries provided by banks that record all transactions within an account over a specified period.
Expense Reports: Documents submitted by employees documenting business expenses incurred.

Frequently Asked Questions (FAQs)

What types of transactions require a source document?

All types of financial transactions, including sales, purchases, cash receipts, payments, and internal transfers, require source documents.

Why are source documents important in accounting?

Source documents provide evidence and verification for transactions, support audit and regulatory compliance, facilitate error detection, and ensure accuracy in financial statements.

How long should companies retain source documents?

Retention periods vary by jurisdiction and type of document but commonly range from three to seven years to meet regulatory and tax requirements.

What should be included in a source document?

Key components include the date of the transaction, description of the transaction, parties involved, amounts involved, and authorization or approval signatures when necessary.

Are digital source documents acceptable in accounting?

Yes, many jurisdictions accept digital source documents as long as they are accurate, durable, and accessible for the required retention period.

Audit Trail

An Audit Trail is a chronological set of records that provide documentary evidence of the sequence of activities leading to a particular financial transaction. It helps in tracking the origin, evolution, and evidence for each transaction entry.

Bookkeeping

Bookkeeping is the process of recording financial transactions systematically and continuously in financial books or accounting software, based on source documents.

Financial Statement

A Financial Statement provides a formal record of a company’s financial activities and positions, usually prepared from recorded transactions substantiated by source documents.

General Ledger

The General Ledger is a master record of all the company’s financial transactions aggregated from sub-ledgers and detailed by individual account.

Internal Control

Internal Control refers to procedures and policies implemented by a company to ensure the integrity of financial and accounting information, compliance with laws and regulations, and the effective and efficient operation of the organization.

Invoice

An Invoice is a commercial document issued by a seller to a buyer, indicating the products, quantities, and agreed prices for products or services provided.

Receipt

A Receipt is a document acknowledging that a payment has been made by a buyer to a seller for goods or services rendered.

Online References

Suggested Books for Further Studies

“Fundamentals of Accounting” by Donatila Agtarap-San Juan
“Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
“Financial Accounting for Dummies” by Maire Loughran
“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
“Principles of Accounting Volume 1 Financial Accounting” by Mitchell Franklin, Patty Graybeal, Dixon Cooper

Accounting Basics: “Source Document” Fundamentals Quiz

### What is a source document in accounting? - [ ] A summary of the company's monthly operations. - [ ] A typed written agreement signed by the CEO. - [x] The first document to record a transaction. - [ ] A cash flow statement. > **Explanation:** A source document is the primary or first document that records a financial transaction, providing essential proof and details of that transaction. ### Which of the following is an example of a source document? - [x] Invoice - [ ] Balance Sheet - [ ] Annual Report - [ ] Budget Outline > **Explanation:** An invoice is a source document as it details the specifics of a sale transaction, whereas the others are not primary records of individual transactions. ### What vital information should a source document contain? - [x] Date, description, amount, and parties involved - [ ] Date and parties involved only - [ ] Amount and signature of CEO - [ ] Date, reason for transaction, and company logo > **Explanation:** Essential components of a source document include the date, description of the transaction, amount, and parties involved. ### How long are companies generally required to retain source documents? - [ ] Less than 1 year - [ ] 2 years - [x] 3 to 7 years - [ ] Indefinitely > **Explanation:** Companies are usually required to retain source documents for periods ranging from three to seven years to comply with regulatory and tax requirements. ### Can digital source documents be used in the accounting process? - [ ] No, only paper documents are valid - [x] Yes, if they are accurate and accessible - [ ] Only if they are converted to paper format - [ ] No, digital documents are not recognized legally > **Explanation:** Digital source documents are accepted as long as they are accurate, durable, and remain accessible for the required retention period. ### What is not typically considered a source document? - [ ] Bank Statement - [ ] Receipt - [ ] Purchase Order - [x] Income Statement > **Explanation:** An Income Statement is a financial report summarizing income and expenses, not a primary record of transactions. ### Which of the following is most likely produced by bookkeeping from source documents? - [ ] Annual Report - [ ] Financial Statements - [x] General Ledger - [ ] Business Plan > **Explanation:** Bookkeeping records transactions from source documents into the General Ledger, from which financial statements can be prepared. ### What essential role does a source document serve in an audit? - [ ] It helps design new business inflows - [x] It provides evidence and verification for transactions - [ ] It represents shareholder interests - [ ] It manages company's marketing strategy > **Explanation:** Source documents provide essential evidence and verification for the transactions included in financial reports, serving as a foundational element during an audit. ### Which department commonly issues invoices as source documents? - [ ] Human Resources - [ ] Marketing - [x] Sales - [ ] Research and Development > **Explanation:** The sales department commonly issues invoices to record the sale of goods or services as source documents. ### When reviewing an expense report, what would determine its validity as a source document? - [ ] It contains futuristic expenses - [ ] It is unsigned - [x] It details business expenses incurred - [ ] None of the above > **Explanation:** An expense report is valid as a source document if it details business expenses incurred, with appropriate documentation and approval.

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