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What Are Source Documents in Accounting?

Last editedApr 20222 min read

Small business accounting includes a variety of paperwork used to create the company’s financial statements. Purchase orders, invoice source documents, and receipts form the backbone of the accounting books, containing all relevant details regarding each transaction. Here’s a rundown of these various business source documents and how they are used. 

Invoice source documents in accounting

Before recording a business transaction in your business’s accounting books, you must be sure that you’re reporting the correct transaction date, payer, payee, and amounts. Source documents are the physical proof of this information, providing a reference point for the bookkeeping process. They can also be used as evidence for an audit or for tax preparation. While these records may be physically filed away as paperwork, in many cases they will be electronic with a timestamp and date for reference.

Both parties involved in any transaction should receive a copy of the relevant document for their own records. These will provide evidence of the transaction’s:

  • Date

  • Amount

  • Payer and Payee names

  • Reference number

  • Description of services rendered

This is all the information needed to create an accurate accounting entry.

Types of business source documents

In addition to a source documents invoice, there are many other forms that this evidence might take. Here are a few common examples.

  1. Delivery dockets provided by a vendor to show the items due to be shipped or mailed. These should include a description of all items marked for delivery.

  2. An invoice is a source document that shows all details of the sale, including payment terms. These details are entered as a sales invoice by the seller, and a purchase invoice by the buyer.

  3. Payment and remittance advice mark the invoice as being paid, detailing the amounts and invoice numbers. It accompanies payment, either by check or electronically.

  4. Payment receipts are issued by the supplier to show that a customer has paid their bill. This is particularly important for cash payments, providing evidence of receipt.

  5. Bank deposit slips serve as evidence that money has been deposited into the seller’s bank account.

  6. Bank statements support the accounting books by showing any adjustments to the company’s cash balance.

  7. Timecards show how many hours an employee has worked, used to support the issuance of any accompanying electronic payments or paychecks.

How to file and track business source documents

The examples above are some of the main source documents you’re likely to encounter during daily business operations, but any evidence relevant to your accounting ledgers will qualify. Once you’ve submitted or received a source document invoice or receipt, what should you do with it?

It’s important to devise an organized filing system to ensure your supporting paperwork is available for reference. There are numerous controls to help make the system more efficient.

  • Pre-number your documents to keep them in order. This will also ensure it’s easier to track down any missing paperwork.

  • File paperwork by category or in alphabetical order for easier retrieval.

  • Reconcile account balances with supporting documents to ensure they’ve been recorded.

  • Use an automated filing system for easier reconciliation and tracking. Most accounting software will do this for you.

How long should you hold onto source documents?

While regulations will vary, it’s recommended to retain your source documents for five to seven years for tax purposes.The IRS states that small businesses must hold onto any records that support deductions, income, and credits until the period of limitations for that tax return has expired. This can be anywhere from three to seven years, depending on your tax situation.

Once the period of limitations has ended and you no longer need your source documents, you should dispose of them securely. Shred all physical paperwork and ensure your cloud storage is empty, making room for more recent documents.

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