A source document is any original document of a transaction. This document will always include the date the transaction took place, the amount of the transaction, and any other terms or conditions that pertain to the transaction. A source document can be as simple as a deposit receipt from the bank or as complicated as a few hundred page insurance policy. Source documents are extremely important for accounting and should always be given to the accounting department. Some of the most common types of source documents are: insurance policies, loan agreements, mortgages, rental agreements for both operating and capital leases, purchases orders, employee time cards, vendor invoices, paid bills with check stubs attached, and cash receipts.
Accrual accounting is not accurate without verifying source documents prior to entering the transactions into the accounting file. Source documents include all the pertinent information for entering a transaction: dates, amounts, principle vs. interest payments, from whom a purchase was made, to whom a bill was paid, when an employee worked and for how long, etc. As you can see, without these types of details, transactions cannot be recorded and accurate financial reporting is not possible.
Another key fact found on source documents is the term of loans and mortgages. These terms indicate the life of an agreement and allow for accurate monthly expense reporting. Often, these source documents will provide amortization schedules as well.
All source documents should be kept on file, physically and digitally. These should be sorted by document type, and made readily available for future reference. It is also wise to create electronic copies of all source documents as a backup, as well as for ease of accessibility. If a company goes through an audit, source documents must be available for review by the auditors.Written by: Andrea Steinbrenner TGG Accounting