What are source documents? Why are they important?
As mentioned previously, the source document is the first document that exists relating to the transaction.
Bookkeepers and other accounts personnel are adamant that a business keeps physical copies of everything. Source documents are those physical copies. They are evidence of the transaction taking place, on what days and at what amounts. If source documents do not exist for a transaction (due to being lost or thrown away or not recorded in the first place), accounting for the transaction becomes very difficult indeed.
Here are some of the most common source documents:
These are documents listing goods or services provided, as well as their prices. Suppliers normally send an invoice together with goods (or once services have been delivered) so as to indicate the amount of payment required to be paid to them. In addition, invoices often indicate how soon the payment is to be made, the business banking details, etc. Invoices thus normally relate to credit transactions.
These are documents confirming that cash or goods have been received. Receipts thus normally relate to payment that has been made by cash or through a debit or credit card.
These are documents serving as proof that cash has been deposited in a bank account.
This is the part of the cheque (or check in the U.S.) kept by the drawer (writer) of the cheque as a record of the transaction.
Each check would have a counterfoil on the same page of the checkbook. The image above shows the check on the right, which would be torn out, while the counterfoil on the left is the stub that would remain in the checkbook.
Some checkbooks don't have counterfoils. Instead they have separate pages at the back of the checkbook (behind all the checks) where you can hand-write the details of checks you have issued including the check number, the value and who/what they were for.
A report showing the amount owed by one business to another, as well as details of transactions between the two businesses.
These are documents serving as proof that payment has been made, often used as proof of electronic transfers (payments through the internet or using other electronic means).
Those are the most common source documents that you will find in the business world.
The next step in the accounting cycle is to take the data from these source documents and use this data to make a journal entry.
We have now answered the question "What are source documents?" and can move on to the next lesson on journal entries.