Key Takeaways
- A source document is an original document that serve as evidence that a transaction occurred in the business. They are used to record financial transactions in the accounting system of a company.
- Source documents are also used to verify the accuracy of a company’s financial record during an audit.
- Common examples of source documents are invoice, cash receipt, bill, statement of account, check, bank deposit slip, cash voucher, promissory note, debit note, credit note, estimate, quote, purchase order, bank statement, and employee timesheet. Additional source documents can be used depending on the needs of the business.
Overview of the Accounting Cycle
Gathering of business source documents is the first step in the accounting cycle of the business. The Accounting Cycle refers to the steps that a company takes to prepare their financial statements.
Below are the steps in the accounting cycle, done in the following order:
- Gathering of business source documents
- Analyzing and journalizing business transactions
- Posting journalized transactions to the ledger
- Preparing an unadjusted trial balance
- Journalizing and posting adjusting entries
- Preparing an adjusted trial balance
- Preparing the financial statements
- Journalizing and posting closing entries
- Preparing a post-closing trial balance
- Journalizing and posting reversing entries
Introduction to Source Documents
A Source Document is an original record that serves as an evidence of a transaction or event that has occurred in a company during an accounting period.
Every business transaction that takes place in your company gives rise to source documents which serve as proof that the transaction existed. These documents capture relevant information about the transaction and are used as reference when recording transactions in the accounting system.
A source document may contain some or all of the following information:
- Transaction date
- Reference number
- Description of the transaction
- Agreed terms and conditions between the company and other parties
- Products or services sold, purchased or transferred
- Quantity
- Unit price and total amount due
- Any tax involved in the sale or purchase transaction
- Signature of the maker and/or approver of the document
Aside from those mentioned above, additional information can also be indicated depending on the type of source document being issued. All these information serve as data input that you may need when recording business transactions in the accounting journal and ledger.
Handling source documents
Source documents are an important part of your company’s accounting information system because they are used to record transactions and verify the accuracy of the company’s accounting records especially during an audit. This is the reason why source documents should be retained and archived over several years for future reference.
It is important that you keep backups by scanning the hard copies of the documents and saving multiple copies using an automated backup system which consists of a combination of local physical drives and cloud storages. Digitizing your source documents would also help in making them more accessible when you need them.
Your company should also establish standard procedures and controls for the generation and management of source documents. A properly managed paperwork system results in accurate and complete accounting records. Even if the documents are digitally generated, it is still important that your company create backups or even print them to ensure their availability in situations where there is an audit or lawsuit.
One important internal control that is being used for source documents is to pre-number them or indicate a sequence of numbers on the face of the document to avoid fraud or missing documents. These numbers also help with reconciling ledger balances with individual transactions.
Common Examples of Business Source Documents
Below are some of the source documents that are used by businesses on a regular basis. Other documents that are not mentioned can also be used by your company depending on the nature of your business and industry.
- Invoice
- Cash receipt
- Bill
- Statement of account
- Check or cheque
- Bank deposit slip
- Cash voucher
- Promissory note
- Debit note and credit note
- Estimate or quote
- Purchase order
- Bank statement
- Employee timesheet
Invoice
An Invoice serves as an evidence of a sales transaction and is issued when a product is sold or a service is rendered for cash or on account. The invoice is sent together with the products that were delivered or once the service was rendered.
If you’re a seller, the invoice is called a Sales Invoice. On the other hand, the invoice is a Purchase Invoice if you’re the buyer. In addition, the term Service Invoice can also be used by your company when selling a service.
A sale is recorded by the seller based on the invoice that they have issued for a product or service sold. On the other hand, the buyer uses the same invoice to record an expense, an inventory purchase or a fixed asset purchase.
A typical invoice contains the following information:
- Details about the seller and the buyer
- Transaction date
- Document serial or reference number
- Terms of the sale
- List of items or services sold
- Unit price
- Total amount due
- Any sales tax or VAT due.
Cash Receipt
A Cash Receipt is issued when the seller receives cash or check from the buyer upfront for the sale of products or services. It serves as an acknowledgement by the seller for receiving cash or check payments from the buyer.
Other terms used to describe a document issued as evidence of receipt of cash payments are Official Receipt, Collection Receipt, Sales Receipt, and Cash Acknowledgment Receipt. In stores that use cash register machines in computing and recording the sale of items and their amounts, the Cash Register Slip/ Tape is issued as evidence for the receipt of money by the cashier.
If your business only sells products and services for cash and not on credit, the document Cash Invoice, is enough as evidence of the sales transaction and receipt of cash. However, if your business also sells on credit and the buyer makes a payment on the outstanding invoice your business issued, then reference of that invoice should be made on the cash receipt that you issued for the payment.
A cash receipt shows the following information:
- Transaction date
- Reference number
- Details of the sale if no invoice was previously issued (items, quantity, price, and any applicable taxes)
- Information about the company and the payor/payer
- Signature of the person who received the payment
Sometimes, you may notice a barcode that is printed at the bottom of the cash register receipt. This usually serves as a lookup of the transaction for when a customer returns an item or for transaction validation purposes.
Receipts are also issued for credit card or debit card payments. For online purchases, receipts can be accessed by the buyer using their account with the seller’s e-commerce platform or they can be sent by the seller to the buyer’s email address. The payment confirmation shown in the website also serves as receipt of electronic payment from a customer in an online transaction.
Bill
A Bill is issued by the seller to the customer for products or services sold for which payment is due and demandable on a certain date that is indicated on the bill. The invoice issued by the supplier can actually serve as a bill by the seller to the customer.
Similar to an invoice, a bill contains the following information:
- Details about the buyer and seller
- Transaction date
- Document serial or reference number
- Terms of the sale
- List of items or services sold
- Unit price and total amount due
- Any applicable sales tax or VAT.
Statement of Account
A Statement of Account is a document issued to the customer that contains a list of all the invoices under their account at a particular point in time. It is sent to the customer on a regular basis, usually every month, and serves to notify the customer of any outstanding invoices that are pending payment.
The difference between an invoice and a statement of account is that the former triggers a transaction entry in the accounting records while the latter only serves as a reminder or notification to the customer of their outstanding bills or invoices.
Even if the statement of account can serve as a basis for payment to the supplier, it could lead to double payment of one invoice because the statement may not yet reflect any previous payments made by the customer. That’s why it is prudent to base the payment on an outstanding bill or invoice instead of a statement of account.
Check or Cheque
A Check or Cheque is a negotiable instrument that evidences an unconditional order to the bank by the maker of the check to pay the bearer or the person named in the check a specified sum of money. Simply put, it is an order by a customer to the bank to transfer money from the customer’s bank account to the seller or another person.
A check serves as a substitute for paying cash to settle an obligation. It can be used in cases when your company needs to pay a creditor or supplier a large amount to settle an obligation, but paying such amount is impractical and not secure.
The amount in the check is drawn from the company’s checking account with a bank. Once the payee presents the check to the bank and receives the amount specified on the check, the said amount will be deducted from the company’s checking account balance.
A check contains the following information on its face:
- Drawee – the bank or financial institution where the check can be presented for payment.
- Payee’s name – the recipient of the amount indicated in the check.
- Drawer’s name – the person or entity making the check.
- Date of issue – a date from which the validity of the check can be determined. A check becomes stale after a certain period of time (usually 6 months) has lapsed from the date of issue and the check is not yet presented for payment by the payee. A check that has an issue date in the future is called a post-dated check and may not be able to be presented for payment until the issue date arrives.
- Currency amount – this is the amount payable to the payee. The amount is written in words and figures and both must tally.
- Signature of the drawer
- Machine readable routing number and account information – shows the serial number of the check, the bank’s branch code and the current account’s number.
The words check and cheque refer to the same thing in the context of financial instruments. In American English, the word check is used while in British English and many places outside the United States, the word cheque is mostly used.
Checks are also accompanied by a Check Voucher which is a document that serves as a paper trail for the issuance of checks when making payments. The check voucher contains the following information:
- Payee’s name
- Signature of the payee indicating receipt of the check
- Transaction date and details
- Voucher serial number
- Payment amount
- Signature of the employee preparing the voucher and check
- Signature of the employee approving or authorizing the check payment
- Reference to documents involved in the transaction such as check number, purchase order number and invoice number
- The ledger accounts in which the disbursement will be charged.
Bank Deposit Slip
A Bank Deposit Slip is a form that serves as an evidence for any deposit that your company makes to its account in the bank. The deposit slip is presented to the bank together with the checks and cash to be deposited. A bank clerk then verifies and processes the deposit and a machine validated receipt printed in the deposit slip will indicate that the deposit was received and recorded by the bank.
The deposit slip shows the following information:
- Deposit date
- Depositor’s name and bank account number
- Total amount deposited
- Breakdown of the cash and checks included in the deposit.
When the bank statement arrives, it will show the amount of the deposit as an addition to the account balance of the depositor.
Cash Voucher
If issuing a check is a safer and more efficient way in paying for large purchases, then is it still a good payment option for your company if it needs to buy items with smaller value? Would it be practical to write a check for petty expenses such as the purchase of a box of pens for office use? In this scenario, paying with cash is the more practical way.
A Cash Voucher is a document that is used to support the payment of cash by the company instead of issuing a check when purchasing products and services or settling debts. This is used as a paper trail to monitor and control cash payments made by your company.
Cash payments are made when a supplier or creditor prefers to receive cash instead of the company’s check. If the cash payment is made out of a petty cash fund, the Petty Cash Voucher is used. A Petty Cash Fund is a cash fund established by a company for the payment of smaller expenses and is kept under the custody of a trusted petty cash custodian.
The cash voucher contains information about the following:
- Payee
- Signature of the payee indicating receipt of the cash
- Transaction date and details
- Voucher serial number
- Payment amount
- Signature of the employee preparing the voucher
- Signature of the employee approving or authorizing the payment
- Reference to documents involved in the transaction such as purchase order number and invoice number
- Ledger accounts in which the disbursement will be charged.
Promissory Note
A Promissory Note is a legal instrument containing a written promise to pay a definite amount of money at a specified future date and serves as evidence for bank loans or purchase transactions which are payable at a future date. In other words, a promissory note is a written promise by the borrower to pay the lender on demand or at a given future date.
Promissory notes can either be interest-bearing or noninterest-bearing. An interest-bearing note has a specified interest rate charged on the outstanding principal. On the other hand, a noninterest-bearing note has no stated interest rate on its face.
A promissory note contains the following information:
- Details about the maker-debtor
- Details about the payee-creditor
- Date of the promissory note
- Loan amount in words and in figures
- Payment date or payment dates if paid in installments
- Details of each payment
- Any interest rate
- Any collateral involved
- Signature of both parties including signature of any third party guarantor
- Expressed promise of the maker-debtor to pay
Debit Note and Credit Note
When your company sells a product to a customer, the latter may return it and ask for a refund for some reasons such as if they find any defect in the product. In this case, a credit or debit note can be used to record the decrease in the amount that is payable by the customer if they have an outstanding balance with the company. If there is no outstanding balance, the amount will be refunded.
Some of the reasons for the issuance of a credit or debit note are as follows:
- Return of defective items
- Incorrect amounts charged in the invoice
- Overpayments made by the customer
A Credit Note is issued by the seller to the buyer which reduces the seller’s accounts receivable with the customer. On the other hand, a Debit Note is issued by the buyer to the seller which reduces the buyer’s accounts payable with the seller.
Both documents contain the following information:
- Details about the buyer and seller
- Transaction date
- Document serial or reference number
- Details of the return or overpayment
- Invoice number against which the debit or credit note is issued
- The amount related to the return or overpayment, with proper tax applications
- The ledger account of the buyer that will be reduced
- Signatures of either parties who issued the debit or credit note
Estimate or Quote
Estimates and Quotes are documents issued to a customer upon their request for a list of products or services they they need from the company and the price that may be charged for those items. The main difference between an estimate and a quote is that the former’s amount is uncertain and still open to changes while the latter’s amount is fixed and certain. Once the customer accepts the estimate or quote and places an order, an invoice will then be prepared to replace them.
The estimate and quote show the following information:
- Details about the seller and customer
- Date of the document
- Description of the transaction and the products or services to be sold
- Unit and total price
- Any applicable sales tax or VAT.
It is important to note that an estimate or quote is not a source document that triggers an accounting entry in the accounting books of the company. They are only used to inform the customer and are attached to the invoice as reference.
Purchase Order
A Purchase Order is a document prepared and issued by a company to the supplier for any products or services that the company intends to buy from the supplier. It helps give clear expectations of what the company needs from the supplier.
The purchase order does not usually contain any price because the company may not know the cost of the products and services of the supplier. A supplier invoice replaces the purchase order once both the company and the supplier have agreed on the terms indicated in the purchase order and the supplier begins the fulfillment process. This time, the invoice already contains the unit price of the items and the total amount due.
A purchase order show the following information:
- Details about the company and the supplier
- Date of the document
- Document serial or reference number
- Description of the transaction
- Details of the services or products being ordered
- Any transaction terms and conditions.
Just like an estimate or quote, the purchase order does not trigger an accounting entry in the books of the company. It is only used to inform the supplier and is also attached to the supplier’s invoice as reference.
Bank Statement
A Bank Statement is a document provided by the bank to the company that shows a summary of transactions that occurred in the company’s checking account with the bank over a given period of time, usually monthly.
Bank statements show in detail the following information:
- Period covered by the bank statement
- Deposits made by the company
- Checks issued by the company
- The beginning and ending balances of the bank account
- Any bank service charge or finance cost
- Any other transactions that are supported by the bank’s debit and credit memos
The bank statements are used as reference by accountants when doing periodic reconciliations of company checking accounts with the bank. They are traditionally sent by the bank as printed forms in the company’s mailbox. However, the internet makes it possible for the bank to send the statement electronically to the company’s email. Bank transactions can even be downloaded directly to the company’s accounting software.
Employee Timesheet
An Employee Timesheet is a document or electronic record that tracks the amount of time spent or the total hours that an employee works for the company or on a specific job. It is used primarily for payroll computation.
The hours worked by an employee provides the basis for the computation of his or her salary or wage. If the hours worked by an employee are billed to customers, such as in the case of a service-based business, then the timesheet serves as a basis for the computation of the amount that will be shown in the invoice.
The employee timesheet shows the following information:
- Names of the employees
- Each day within the payroll period
- The hours worked by each employee per day
- The total hours worked for the whole payroll period.
- If the time worked by the employees are billable to a customer, then the name and job order will also be shown in the timesheet.
Review Questions
- What are source documents?
- Why do we need to retain and archive the source documents of a business?
- How can digitizing source documents help?
- Why is pre-numbering source documents important?
- What is the similarity between a quote and a purchase order?
