Accounting Source Documents and Accurate Records

Accounting source documents serve as the backbone of any accounting system.

They are the original records that document a company’s financial transactions and provide evidence of these transactions. These documents are crucial in accurately recording and producing a company’s financial statements, performance, and cash flows.

Accounting Source documents for small business

We will explore the various accounting source documents and their importance in maintaining accurate financial records.

What are Accounting Source Documents?

Source documents in accounting are the original records that capture the financial details of every transaction your business makes. A source document is generated whenever you buy office supplies, sell a product, pay an employee, or receive a customer payment. It can be a physical document like a receipt, invoice, or cheque or a digital record like an electronic invoice or bank statement.

The importance of source documents goes beyond simply having a business transaction record. They establish a crucial paper trail, a clear path that allows you to trace the money flow throughout your business.

Common Types of Accounting Source Documents

There are many different documents that a business will receive or produce during its day-to-day activities. Here is a list of some of the most common documents:

 

Sales Documents

Sales Invoice – Invoice source documents list the products or services a customer purchases and the total amount due. It includes details such as item descriptions, quantities, prices, and any applicable taxes.

Sales Invoice Template UK VAT example

Sales Receipt – Similar to an invoice, this document provides proof of payment for a sale. It typically includes similar information as an invoice but may also include a signature from the customer acknowledging receipt of goods or services.

Credit Note – A credit note adjusts a customer’s invoice if there is an error or if they return goods. It typically includes the original invoice number, the amount being credited, and the reason for the credit.

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Purchase Documents

Purchase Orders – A purchase order is created by a business when purchasing goods or services from a supplier. It outlines the purchase details, such as item descriptions, quantities, prices, and delivery dates.

Goods Received Note – This document is generated upon receiving goods from a supplier as verifiable evidence of their delivery.

Purchase Invoices – A purchase invoice is similar to a sales invoice; this document lists the products or services purchased from a supplier and the amount due.

Receipts – These documents are proof of payment issued by the supplier when a purchase is made. These are often provided when paying by debit or credit card.

Cash Documents

Cheques are a special bank note from a customer’s bank account to pay a specific amount to a recipient.

Remittance Advice is issued by a customer to a supplier, indicating that payment has been made for goods or services.

A Bank Deposit Slip is a document used to deposit cash or cheques into a bank or building society.

ATM Receipts are issued by a cash machine after a transaction, providing withdrawal details.

Bank Statements show all the transactions made in a bank account over a specific period. A bank reconciliation is essential to ensure all transactions are recorded in your bookkeeping software.

Online Payment Platforms – With the rise of e-commerce, online payment platforms such as PayPal and Stripe have become popular payment methods. These platforms provide reports of transactions and fees payable.

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Other documents

Timesheets record the number of hours an employee has worked. They are crucial in calculating wages and tracking employee productivity.

Expense Reports detail any expenses incurred by employees on behalf of the company, such as travel costs or office supplies.

Contracts and loan agreements show a breakdown of the agreement and include any interest and direct debit agreements.

A Source Document and the Bookkeeping Process

Source documents play a critical role in the bookkeeping process by:

Initiating the Process: Every transaction triggers the creation of a source document. This document, whether a physical receipt or a digital invoice, serves as the starting point for recording the transaction in the accounting system.

Providing the Details: Source documents include essential information, like the date, amount, description of the transaction, and the parties involved. This detailed information allows the bookkeeper to accurately categorise and record the transaction in the appropriate accounts (e.g., sales account, expense account).

Ensuring Accuracy: Complete and accurate source documents are vital for maintaining the integrity of your financial records. They act as a reference point, allowing the bookkeeper to verify the information entered into the accounting system.

Building a Paper Trail: Each document acts as a footprint, tracing the money flow through your business. This transparency is essential for both internal control purposes and external audits.

Importance of Maintaining Source Documents

There are several key reasons why source documents are so important in accounting:

Accuracy: They are the foundation for accurate financial records. Imagine building a house without a solid foundation – even minor errors in source documents can lead to significant discrepancies in your financial statements.

Transparency: Source documents create a clear audit trail, allowing you and external parties to trace the money flow throughout your business. This transparency is essential for maintaining internal control, preventing fraud, and demonstrating financial accountability.

Streamlined Processes: Having organised and readily available source documents streamlines various bookkeeping tasks. Reconciling bank statements, preparing tax returns, and resolving disputes become much easier when you have clear documentation to reference.

Decision Making: Accurate financial records built on reliable source documents empower better decision-making. You can gain a clearer picture of your business’s financial health, identify areas for improvement, and make informed financial decisions for the future.

The Great Debate: Digital vs. Paper Source Documents in Accounting

The accounting world has witnessed a significant shift in recent years – the rise of digital record-keeping. However, while digital solutions offer undeniable advantages, paper documents still hold a place in some businesses. Let’s delve into the pros and cons of both methods:

Paper Documents:

  • Pros:
    • Familiarity: Many businesses and individuals are comfortable with the traditional paper trail.
    • Tangible Proof: Physical documents can provide a sense of security and permanence.
  • Cons:
    • Organisation: Storing and organising paper documents can be cumbersome, leading to misplaced or lost records.
    • Accessibility: Physical documents are not readily accessible from different locations, making collaboration and remote work challenging.
    • Susceptibility to Damage: Paper is prone to wear and tear, fading, or destruction in fires or floods.
    • Environmental Impact: Paper production consumes resources and contributes to environmental concerns.

Digital Documents:

  • Pros:
    • Organisation: Digital documents are easily searchable, categorised, and stored in cloud storage solutions, allowing efficient retrieval.
    • Accessibility: Documents can be accessed from anywhere with an internet connection, facilitating collaboration and remote work.
    • Security: Cloud storage can offer robust security features to protect sensitive data, potentially exceeding the security of physical storage.
    • Environmentally Friendly: Reducing reliance on paper lowers the environmental impact of record-keeping.
    • Integration with Accounting Software: Digital documents can seamlessly integrate with software, automating data entry and reducing errors.
  • Cons:
    • Tech Dependence: Reliance on technology can lead to issues like system crashes or data loss if proper backups aren’t in place.
    • Tech Savvy Required: Some individuals might require training or assistance navigating digital document management systems.

Cloud Storage and Accounting Software:

Cloud storage plays a crucial role in digital document management. Secure cloud platforms allow you to store and access your documents from anywhere, anytime.

Bookkeeping software further enhances efficiency by integrating seamlessly with digital documents. Many software programs allow you to scan receipts, upload invoices, and automatically link them to the appropriate transactions in your accounting system.

Below is an example of how to attach an invoice to a Document within Xero accounting software.

Xero Attach Source Document

Filing System

Organisation is vital whether you are using a digital or paper-based filing system. Create a clear and consistent naming convention for your digital files and folders to make them easily searchable. Consider labelling folders or using colour-coded labels for paper-based systems for different categories.

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Depending on the type of documents might depend on how you file them, the options are:

  • Chronological: Documents are filed by date, offering a simple method for easy retrieval based on the transaction date.
  • Alphabetical by Vendor/Customer: Documents are organised based on the name of the vendor or customer they relate to, making it convenient for tracking specific business partners.
  • Categorical: Sales and purchase invoices are grouped by transaction type (sales invoice, purchase invoice, expenses) for easier classification and management.

How long do I need to Keep Accounting Documents?

The minimum amount of time you need to keep bookkeeping documents in the UK depends on whether you’re self-employed or a limited company:

  • Self-employed: You must keep your records for at least five years after the 31st January submission deadline of the relevant tax year. For instance, if you submitted your 2022 to 2023 tax return by January 2024, you wouldn’t need your records until the end of January 2029. (https://www.gov.uk/self-employed-records/how-long-to-keep-your-records)
  • Limited company: You must keep your records for at least six years from the end of the last company financial year they relate to.

In conclusion, accounting source documents play a crucial role in the financial management of a company. These documents provide evidence of all financial transactions and serve as a reliable reference for recording and auditing purposes. It is important to maintain accurate and organised source documents to ensure the accuracy and reliability of financial statements. By understanding the significance of these documents, businesses can effectively manage their finances and make informed decisions for future growth and success.