What is Source Documents? Importance, Maintaining

Udacity Offer 50 OFF

What is Source Documents?

A source document refers to any original record which contains the details of and serves as proof or record of a transaction that has either been entered or will be entered in the accounting system. When formal methods of accounting were not introduced, source documents were found in handwritten notes. With the passage of time, source documents were printed on paper. At present, you can see a combination of printed and electronic source documents.

Some examples of source documents are cancelled cheques, invoices, cash receipts, computer-generated receipts, for a refund a credit memo is issued, employees’ attendance sheet, bank deposit slips, purchase orders, delivery challans, etc

For every financial transaction, a business keeps evidence in the form of a generated paper trail or digital trail. This trail is called a source document in accounting terms. For example, a cheque is drawn for purchasing office stationery and given to the supplier and the supplier issues a receipt against it.

In this case, the cheque and the receipt are the source documents, i.e., evidence that such a transaction has taken place. A source document is created when a transaction or event is happening or is done. It shows all the facts of the transaction such as the amount of the transaction, with whom the transaction was made and the date of the transaction.

Importance of a Source Document

Source documents are extremely important because they form the basis on which the accounting process rests.

The following points describe the importance of source documents:

Evidence of transaction

If you want to check whether a transaction has taken place along with its details, a source document serves as important evidence. Every financial transaction recorded in the books of accounts is backed by a source document.

Basis for bookkeeping and record keeping

Source documents are the basis of recording financial transactions such as purchases, sales, receipts and payments by an individual or a business entity. These documents are filed for audit purposes. The auditor or inspector verifies the details from these source documents. It is mandatory for businesses to maintain all these records and keep them till seven financial years.

Therefore, these documents are always kept in custody of the accounts department under an authorised person so that there is proper control and no documents are misplaced or tarnished.

Basic facts

The source document gives all basic facts of the transaction and errors in recording transactions.

Maintaining Source Documents

Source documents should be maintained in originals only. However, in some circumstances, photocopies or computer-generated copies could be maintained (it has been legally allowed now).

An original source document contains the signature and seal of the business, where information cannot be forged or tarnished. In photocopy, the details of the transaction can be forged; thus, photocopies should be avoided and original documents must be maintained.

However, scanned documents can be accepted if they show the exact details of the original ones and there is no way of manipulation.

For example, if a delivery challan is scanned and it shows the number of items delivered, date and time but does not show the name of the supplier such a document cannot be accepted as it does not give the major details of the transaction. But if the name of the supplier is there and the time of delivery is missing, then this document can be accepted as a minor detail is missing.

Original documents must be maintained properly. For example, small petrol pump receipts, or petty cash expenses receipts must be properly pasted on a bigger sheet and maintained in proper files where they are not destroyed.

Many businesses nowadays and even government organisations are using the IRS standard for the complete, legible and accurate generation of original documents. With digitisation, it has become easy to maintain records digitally. However, many documents of a business are still created in paper form.

Digital payments made and payments received could be supported by bank statements, which could serve as a source document for recording cash or bank entries. Proper safety vaults and systematic filing systems need to be maintained by every business organisation. Precautions against fire, flood and theft should be taken so that documents can be maintained securely.

Leave a Reply