Source Documents

Source Documents:

A piece of paper that is used as evidence to record a transactions.A source document, often called business paper, is the document produced with each business event and used to record every business transaction. In other words, it’s a physical or electronic document that lists the details of a transaction and is used by the accounting department tojournalize accounting information.

Some common examples of source documents include sales receipts,checks, purchase orders, invoices,bank statements, and payroll reports. These are all original documents that were created from a transaction and the first component in an accounting system.

Source documents are used to record transactions because they are original and show an objective report of the economic activities of each transaction. For example, when a company purchases goods from a vendor, the vendor creates a receipt or invoice that shows the goods that were purchases, the purchase price, date of transaction, seller’s name, and the method of payment. 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.

Source documents are also used for internal control purposes as well. 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. Once it is approved, a purchase order is issued and sent to the receiving department when the goods received are compared with the purchase order. A receiving report is issued and all three of these documents are sent to the accounting department to approve the invoice from the vendor. If all of these documents agree, the invoice is approved and the cashier issues a check for the goods.

As you can see, all of the source documents are used to ensure that only proper goods are ordered, received, and paid for.

 

Examples are:

  • Cash Memo:
    This is used for cash transactions. A Cash Memo is received or given when goods are purchased or sold for cash. Hence, all cash transactions are recorded in the books of accounts on the basis of these cash memos. The cash memo is different from Cash Receipt in the sense that it is normally issued for cash received subsequent to the sale of goods but Cash Memo is used for money received instantly.
  • Invoice or Credit Bill:An Invoice or Credit Bill is used for business transactions carried out on credit. A sales invoice is prepared to record the credit sale of goods or provision of services. The original copy of the sales invoice is sent to the purchaser and the seller keeps a duplicate copy as the proof of sale.
  • Receipts:A firm issues a receipt when it receives cash or cheques. It is an acknowledgement of receipt of cash or chequeand acts as a documentary proof for receiving the cash.
  • Deposit Slip:It is a form available from the bank for depositing money or chequein a bank account. It has a counterfoil or a carbon copy, which is returned to the depositor with signature of the cashier, as receipt. The counterfoil or a carbon copy of the deposit slip gives the details regarding the date, the amount (in cash or chequedeposited) etc.
  • Cheque:A chequeis a form made available by a Banker to its account holder. Each chequehas a counterfoil to record the same information written on the chequethat remains with the account holder for his future reference. The counterfoil is taken as a source document to make entries about payments in the books of accounts.
  • Debit Note:Debit note is a note sent to a supplier informing him that his account has been debited to the extent of goods returned to him. It is also used to send to a customer informing him that an additional amount is recoverable from him for difference in price etc.
  • Credit Note: Credit note is a note sent to a customer informing him that his account has been credited to the extent of goods returned by him or sent to a supplier informing him about the difference in price etc.
  • Bank Statement:It is a statement sent by the Bank on a regular basis, say monthly. It shows the running balance of the bank account for the period with details of deposits and payments out of the Bank Account.

Role of Source Documents in Accounting:

  • Recording basis:The source documents are the basis for recording and accounting, without which recording would be virtually meaningless.
  • Authenticates the amount paid or received:The source document establishes the amount paid or received.
  • Evidence in the court of law:The source documents can be produced in the court of law as documentary proof in the event of any dispute involving the accounting entity.
  • Basis for taxation:The tax authorities use the source documents to establish the amount of tax to be paid by the accounting entity extensively.
  • Information about make, quantity, and values:Source documents provide, in brief, the information about the model, make, quantity, amount of tax collected or payable, and the value of transactions.
  • Proof of payment or receipt:The source documents are the proof of payment made and amount received along with their purposes. For e.g., issue of account payee chequesand their record in the Bank Statement is a proof of payment.
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Posted By : smriti | Comment RSS. Category : BBA, BBA-BI, Financial Accounting, Financial Accounting I, FIRST SEMESTER, Second Semester
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