What is Source document?

In the business world buyers and sellers interact to exchange goods and services and other transactions like payment. A diligent accountant keeps the record of all such important transactions about which users must be informed.

However, to have the information reliable the recording of such transaction is controlled by source documents. Source document is basically a first or primary document that records the nature of business transaction and includes:

• Date of transaction
• Amount of transaction
• The other party to the transaction
• Person authorizing to accept the transaction
• Tax amounts involved or deductions or additions
• Any other information that needs to be recorded to keep the record of facts of transaction

Therefore, if a relevant source document connected with a transaction is not raised no accounting recording can be done. As for every transaction recorded there must be a source document to back it up. For example to record purchases entity must have a relevant purchase invoice.

Another thing to understand is that source documents are raised or issued or generated only a person who has the authority to raise such document. To make the controls even more effective a single person must not have the authority to raise multiple source documents. For example the person who is responsible to issue sales invoice must not be authorized to raise sales order or any other document related sales function. In other words, an authority to raise a certain source document gives the person an authority over a certain function or sub-function of entity’s operational activities. For example, raising sales invoice gives authority over function of selling goods.

One of the interesting thing about source document is that source document does not have to be raised by the entity to make the accounting record of the transaction. For certain transactions a source document often comes from parties outside entity and the same accounting document is used to update accounting records. For example to record purchases the source document is the invoice sent by the seller.

So we must understand that to make and update accounting records of ABC Plc source document need not to be raised by ABC Plc. ABC Plc can do the accounting on the basis of documents sent by its customers, suppliers, lenders or others from outside entity. Getting technical about source document, some of the source documents can only be raised if a certain source document exists. Otherwise subsequent source document in a series cannot be validated and must not be approved by the authority. For example if there is no purchase order then there is no question of purchase invoice. Source document however does not necessarily always ultimately end up in debits and credits.

Some source documents are used to finalize other accounting records. For example Time cards to record working hours of labourers is also a source document but that helps in preparing salary slips of employees. One more thing to add about source document is that even a forfeited or cancelled or nullified documents also serve as source documents. For example bounced cheques or cancelled cheques serve as a source document of reversal entries in accounting records.

It is always a good idea to retain source document so the accountants if they need to review again in future then we have an evidence. Source documents also serve as an evidence in conducting audit engagement. Entity are most often bound by legal requirements to maintain and retain such source document for a particular period of time. Here are some of the examples of source documents:

• Customer invoices / Supplier invoices
• Cash receipts / cash memo
• Purchase order / Sales order
• Credit note (credit memo) / debit note (debit memo)
• Cancelled cheques / bounced cheques
• Credit card payment slips
• Bank deposit slips
• Time sheets (time cards)

These source documents, as the name suggest, become the source to make a journal entry in different journals. To learn more about journals and their types please read What is Journal and how many types of journals are in accounting?