Source Documents

Source documents are the original records that provide evidence of business transactions. They are the foundation of accurate bookkeeping and essential for audit trails, tax compliance, and financial analysis.

What Are Source Documents?

Source documents are the original records that initiate and support accounting entries. They provide proof that a transaction occurred and contain essential details like:

• Date of transaction
• Amount involved
• Parties involved
• Description of goods/services
• Authorization signatures

Golden Rule

No source document = No journal entry

Every transaction in your books should be supported by proper documentation.

Types of Source Documents

1. Sales-Related Documents

Sales Invoices

• Purpose: Bill customers for goods/services
• What to include: Invoice number, date, customer details, itemized charges, payment terms, total amount
• Retention: Keep for 7 years minimum

Sales Receipts

• Purpose: Proof of payment received
• What to include: Receipt number, date, amount, payment method, description
• Retention: Keep for 7 years minimum

Credit Memos

• Purpose: Document sales returns or allowances
• What to include: Original invoice reference, reason for credit, amount credited
• Retention: Keep with related invoice

2. Purchase-Related Documents

Purchase Orders

• Purpose: Authorize purchases from suppliers
• What to include: PO number, vendor details, items ordered, quantities, prices, delivery terms
• Retention: Keep until order fulfilled, then 3 years

Supplier Invoices

• Purpose: Vendor bills for goods/services received
• What to include: Invoice number, date, terms, itemized charges, total due
• Retention: Keep for 7 years minimum

Receiving Reports

• Purpose: Confirm receipt of goods
• What to include: Date received, PO reference, items received, condition notes
• Retention: Keep with purchase records

3. Cash Transactions

Bank Statements

• Purpose: Record of all bank account activity
• What to include: All deposits, withdrawals, fees, interest
• Retention: Keep for 7 years minimum

Deposit Slips

• Purpose: Record cash/check deposits
• What to include: Date, account number, itemized deposits, total
• Retention: Keep for 3 years

Check Stubs/Copies

• Purpose: Record of payments made
• What to include: Check number, date, payee, amount, purpose
• Retention: Keep for 7 years

4. Payroll Documents

Time Cards/Sheets

• Purpose: Track employee hours
• What to include: Employee name, dates, hours worked, supervisor approval
• Retention: Keep for 4 years

Pay Stubs

• Purpose: Detail employee compensation
• What to include: Gross pay, deductions, net pay, YTD totals
• Retention: Keep for 7 years

Tax Forms (W-2, 1099, etc.)

• Purpose: Report employee/contractor compensation
• What to include: Annual earnings, taxes withheld, employer/employee information
• Retention: Keep permanently

5. Expense Documents

Receipts

• Purpose: Proof of business expenses
• What to include: Date, vendor, amount, items purchased, payment method
• Retention: Keep for 7 years

Expense Reports

• Purpose: Summarize and request reimbursement for expenses
• What to include: Date, description, amount, business purpose, receipts attached
• Retention: Keep for 7 years

Credit Card Statements

• Purpose: Record credit card purchases
• What to include: All transactions, fees, payments, interest charges
• Retention: Keep for 7 years

6. Asset Documents

Purchase Agreements

• Purpose: Document major asset purchases
• What to include: Asset description, cost, terms, warranty information
• Retention: Keep for life of asset + 7 years

Depreciation Schedules

• Purpose: Track asset value over time
• What to include: Original cost, useful life, depreciation method, accumulated depreciation
• Retention: Keep for life of asset + 7 years

Digital vs. Paper Documents

Advantages of Digital Documents

• ✅ Easy to search and retrieve
• ✅ No physical storage space needed
• ✅ Can't be lost in fire/flood (if backed up)
• ✅ Easy to share with accountants/auditors
• ✅ Reduced paper costs

Disadvantages of Digital Documents

• ❌ Requires backup systems
• ❌ Can be accidentally deleted
• ❌ May require specific software to access
• ❌ Security concerns if not properly protected

IRS Acceptance

The IRS accepts electronic copies of documents as long as they are:

• Legible and complete
• Accurately reflect the original
• Easily retrievable
• Properly backed up

Best Practices for Source Documents

1. Immediate Recording

Record transactions as soon as possible after they occur to ensure accuracy and prevent loss of documents.

2. Proper Filing

Organize documents systematically:

• By date
• By vendor/customer
• By transaction type
• By account category

3. Complete Information

Ensure all required details are captured:

• Who (parties involved)
• What (goods/services)
• When (date)
• Where (location if relevant)
• How much (amount)
• Why (business purpose)

4. Sequential Numbering

Use sequential numbers for:

• Invoices
• Purchase orders
• Check numbers
• Receipt numbers

This helps identify missing documents and prevents duplicates.

5. Authorization

Require appropriate approval signatures on:

• Purchase orders
• Expense reports
• Payroll documents
• Large payments

6. Reconciliation

Regularly match source documents to:

• Bank statements
• Credit card statements
• Vendor statements
• General ledger entries

Common Problems and Solutions

Problem	Solution
Lost receipts	Implement immediate digital scanning policy
Faded thermal receipts	Photocopy or scan immediately
Missing purchase orders	Create PO before ordering
Incomplete expense reports	Use standardized templates
Disorganized filing	Implement consistent filing system
No backup for digital files	Use cloud storage with redundancy

Document Checklist for Transactions

For Sales:

• Sales invoice or receipt issued
• Payment received and deposited
• Bank deposit slip retained
• Transaction recorded in books

For Purchases:

• Purchase order created (if applicable)
• Vendor invoice received
• Goods/services received and verified
• Payment made and check/receipt retained
• Transaction recorded in books

For Payroll:

• Time cards collected and approved
• Payroll calculated
• Pay stubs generated
• Tax withholdings calculated
• Payments made
• Transaction recorded in books

Next Steps

Now that you understand source documents, learn about document retention policies to ensure you keep records for the appropriate time periods.