Each time a company makes a financial transaction, some sort of paper trail is generated. That paper trail is called a source document. If a small business writes a check out of its checking account for office supplies, for example, the source document is the check along with the receipt for office supplies.
The source document is essential to the bookkeeping and accounting process. It is the evidence that a financial transaction occurred. If a company is audited, source documents back up the accounting journals and general ledger as an indisputable audit trail.
Keeping a source document for a business is just like keeping your receipts for tax-deductible items for your personal taxes. You have to have those receipts in case your taxes are audited. The same is true for your business, but you don't just keep receipts for tax deductible expenses. You keep receipts (source documents) for every financial transaction.
A source document describes all the basic facts of the transaction such as the amount of the transaction, to whom the transaction was made, the purpose of the transaction, and the date of the transaction.
Here are some examples of common source documents:
- canceled check
- cash register receipt
- computer-generated receipt
- credit memo for a customer refund
- employee time card
- deposit slip
- purchase order
This is not an exhaustive list.
The source document should be recorded in the appropriate accounting journal as soon as possible after the transaction. After recording, all source documents should be filed away in some sort of system where they can be retrieved if and when they are needed.