This article explores the different types of source documents that accountants use to record financial transactions in the UK.
What Defines a Source Document?
Source documents are any form of document that verifies that a transaction took place. This includes receipts, checks, statements, purchase invoices, etc. They form the core of accounting documentation, which all other accounting tasks and documents are based upon.
As a limited company, keeping transaction documentation is a required part of your accounting records.
To be classed as a source document, the item must contain all relevant transaction information. For example, the date, the parties involved, the amount paid, and the transaction substance.
Source documents also need to be clearly signed by each of the parties involved in the financial transaction.
Types of Source Documents
As we’ve already explained, a source document acts as tangible evidence that a business transaction has taken place. Keeping reliable records of your business transactions is vital for tax reasons. When a source document is created, copies should be issued to all parties involved.
There are various document types that could be classed as source documentation. An accountant will either keep one document if it details all the information they need or several if certain pieces of information are missing. Acceptable source documents include:
A receipt serves as the most obvious proof that a transaction has taken place. If you buy something from a supplier, a receipt should be issued to you detailing what you bought, how much you paid, and when the transaction was completed.
Similarly, whenever a consumer buys something from your company, you will have to issue them with a receipt as proof of the transaction.
A delivery docket is included in a dispatch order. It includes a description of the items included in the order. It also details the price, as well as the names of the sender and recipient. Delivery dockets are provided so that recipients can check the physical items against the written description provided. They can also serve as source documents.
Normally, when a customer enquires about a product, they will be issued with a document containing a quote. If they decide to go ahead with the purchase, this document will be converted into a sale invoice by the seller and a purchase invoice by the buyer.
The payment is unlikely to have been finalized on the day the sale invoice was created. However, it contains details regarding the item purchased, the date the purchase was agreed upon, as well as the names of the parties involved in the transaction.
This document is sent by the consumer to the supplier to confirm that an invoice has been paid off. This includes information regarding invoice numbers, as well as the amount paid, dates, and parties involved.
Why Are They Essential?
Source documents are essential when creating your company’s financial statements. They can also be useful in the following instances:
- To verify a transaction date or payment terms
- To prove ownership over specific property
- To boost transparency, which helps to audit your spending and cash flow
How to Properly File Source Documents
Now you know why source documents are essential, you probably want to know how to professionally file them.
Before, the bookkeeping process involved filing source documents in financial books. However, source documents are now filed via accounting software. So, unless you received the document digitally, you’ll have to scan and digitize the hard copy. It may still be a good idea to keep hard copies of source documents for future reference.
Whichever way you choose to file your documents, follow these best practices:
- File your financial statements either in alphabetical order, by date, or by category. This way, you’ll be able to easily retrieve documents.
- Assign a unique number to each individual document to further make them easier to retrieve (most accounting programs will have an automated file system).
Source documents are an important part of any accounting process. They’re used to record and provide information on all financial transactions made in relation to a company. These documents come in the form of receipts, sales and purchase invoices, invoice source documents, and even delivery dockets.
If you’re unsure about source documents, you should hire an accountant.