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Accounting | What is

What Are Source Documents in Accounting?

Tim Yoder

WRITTEN BY: Tim Yoder

PUBLISHED DECEMBER 16, 2021

Table of Contents

1Types of Source Documents

In accounting, “source document” refers to any document that substantiates a transaction. It’s
important to retain and organize source documents to be able to research problems or questions that
arise concerning transactions. You also might need to provide source documents to the IRS if it audits
you or questions anything related to your tax return.

Types of Source Documents

The type of source document you should retain varies with the type of transaction you need to
substantiate. Just as there are different source documents for personal finances and business, there are
specific source documents for accounting. These documents prove not only that a transaction took
place, but also that a business rendered goods or services. They can be classified as either internal or
external source documents.

Internal
Internal source documents are created and used within your business. They’re often used to make
decisions about different aspects of your business, such as assisting with forecasting, setting pricing, and
maintaining accurate financial records.

External

This type of source document originates from an outside company and enables you to prove that your
business completed a transaction with another business. They’re useful when preparing your taxes and
substantiating transactions if questioned by the IRS.

List of Source Documents to Retain

The source documents that you retain depend greatly upon the nature of your business. A freelance
landscaper might have many invoices and receipts, but fewer purchase orders than a grocery store. To
organize these documents best, you must identify which apply to your business.

Sales Workflow

Sales workflow Sample Invoice.

Sample invoice

The sales workflow includes source documents, such as sales orders, packing slips, invoices, sales
receipts, and bank deposit slips. They’re all crucial documents that are important for creating a paper
trail for your company’s transactions:

Sales order: Most commonly used by manufacturers, retailers, wholesalers, or suppliers, a sales order is
a document prepared by the seller and issued to a customer that confirms the sale of goods or services
involved in a given transaction. It contains details about the sale, including the quantity and price of any
goods or services exchanged, delivery date, delivery address, and payment method. It’s an internal
document that’s generated by the vendor and allows companies to keep track of the orders they fulfill.
Recording sales orders is an important part of the sales process, as sales orders reduce the amount of
inventory or materials available for future sales.

Packing slip: A packing slip is a document that includes a complete list of items included in a package. It
often includes such information as stock keeping unit (SKU) numbers, weights, dimensions, and the
number of units that are used by shipping departments to determine what inventory needs to be sent
out to accurately complete an order. If you’re shipping a product to a customer, saving the packing slip
enables you to prove that the purchase took place and was fulfilled.

Invoice: A bill that’s drawn for customers after purchasing goods or receiving services by the business is
called an invoice. Unless required sooner, an invoice is shared with the customer after the item has
shipped. This helps to maintain cash flow and streamlines the accounting process. As shown in the
sample above, a typical invoice includes seller and buyer details, date, invoice number, payment due
date and payment terms, a description of the service or product, and the amount charged.

Sales receipts: A sales receipt is a document that records a sale and can come in many different forms. In
its most basic form, it acknowledges that a seller has been paid for goods or services. The receipt is
always issued by the seller and given to the buyer. It’s provided only after the goods have been
transferred or services have been rendered and the client has paid in full.

Bank deposit slip: When you make a deposit of cash or checks at the bank, you’ll receive a slip to prove
it. This slip breaks down the total amount being deposited and shows the amounts of checks and cash.
Make sure to save these bank deposit slips for your records to verify your income.

Tip: Good bookkeeping software will generate all of these source documents for you as you progress
through the sales process. See our guide, Best Small Business Accounting Software, to find the software
right for your business.

Purchases / Expense Workflow

Purchase and expense workflow includes source documents such as purchase orders.

Sample purchase order (PO)

The purchase and expense workflow includes source documents, such as POs and vendor invoices,
which are essential for tracking your company’s expenses:

POs: If your business regularly purchases inventory to be sold, then you’ll process POs. These documents
detail the dates and amounts of your purchase so that you can manage your expenses. Sometimes, the
supplier will issue this document to you, or you can create it yourself. After the PO is approved, the
vendor will begin the order fulfillment process and return an invoice.

Vendor invoices: Vendor invoices are requests for payment for products or services. They may represent
a bill for ongoing services or can be based on purchase orders for specific items and services. Keeping a
copy of each vendor invoice ensures that you have a record of your expenses and can also keep track of
upcoming due dates.
General Accounting

Credit Card Statement from Chase Bank.

Sample credit card statement

There are a few general accounting source documents that are important to retain for your records.
These include your bank and credit card account statements, copies of your cleared checks, a petty cash
log, and receipts:

Checking account statement: Your bank account statement is an essential document because it helps
you to compare the bank’s records with your own. By reconciling your account statement each month,
you’ll be able to identify and resolve any discrepancies and ensure that your accounting is accurate.

Cleared checks: Checks should always include the name of the payee, date, amount paid, and an
authorized signature. Retaining copies of your cleared checks ensures that you have proof that a
transaction took place, in case there’s ever a question. You can also match these checks with your
account statement each month.

Credit card statement: A credit card statement is a summary of how you used your credit card during a
billing period. The summary includes your payments, credits, purchases, cash advances, balance
transfers, fees, interest charges, and amounts past due. It’ll also show your new balance, available
credit, and the last day of the billing period. It’s important to reconcile your credit card statement to
ensure that you haven’t missed any fraudulent charges, and it can serve as evidence that a particular
purchase was made.

Petty cash log: A petty cash log is where you record petty cash expenditures and is part of a manual
record-keeping system. There are two primary types of entries in a petty cash log, which are a debit to
record cash and a credit to reflect a cash withdrawal from the petty cash fund. These credits can be for
such transactions as payment for office supplies, meals, or stamps.

Receipts: Once the customer pays the bill, the seller issues a receipt that details the order and payment
terms. This source document is proof that the seller fulfilled the order and the client paid the balance.
Receipts should be matched to checking and credit card statements and the petty cash log.

Payroll

Employee Timesheet.

Sample employee timesheet

If your business has employees, you should maintain copies of their timesheets and expense reports as a
backup in case there’s ever a question about the accuracy of a transaction. Often, businesses will bill
their clients for time or expenses that were incurred by their employees. These documents serve as
proof and can be attached to invoices that are sent to the client:

Employee timesheet: A timesheet is a data table that an employer can use to track the time that a
particular employee has worked during a certain period. Businesses use timesheets to record time spent
on tasks, clients, or projects. There are different methods to record timesheets, such as paper,
spreadsheet software, and online time tracking software.

Employee expense reports: If you reimburse your employees’ expenses, you should retain any
applicable receipts for your records. In addition, to avoid treating the payments to your employees as
income, the employee should document the date and purpose of the expense, and the employer must
reimburse the exact amount.

Why Source Documents Are Important

When properly organized and maintained, source documents will provide you with a paper trail for all of
your transactions and serve as records in case of an audit or a need to prove business compliance.
Retaining all source documents allows you to accurately ensure that your books are up to date. All
source documents should be stored, either physically or electronically, for future reference.

Audit Preparation

If your business is audited, your source documents serve as valuable evidence for the income and
expenses that you’re claiming, so it’s important that you save your receipts and deposit slips. It’s
essential that the auditor has access to a clear paper trail of all transactions to confirm the accuracy of
bank and credit card balances. This enhances transparency and ensures that the audit will run more
smoothly.

Business Compliance

In considering all of the elements that are essential for business compliance, the successful management
of source documents is at the top of the list. You should document your compliance with internal
requirements closely with company records. You might need them if you decide to sell your business or
if legal action is taken against your business.

Accounting Data Accuracy

Source documents can be helpful to ensure that your accounting data is accurate. They also provide for
more efficient bank reconciliation. Ideally, you’ll avoid entering transactions directly from a bank
statement and instead enter them from a source document. Having source documents readily available
will make the reconciliation process easier and more accurate. It’ll also help to gather clean data that
can be translated into business insights.

How To Use Source Documents

There are a few things to consider when using source documents, which include how they’re stored, the
formats that are acceptable, and how long the documents should be retained.

Source Document Storage

It’s important to record any information that’s generated through source documents in either your
company’s journal, accounting software, or financial books. After the document has been recorded, it
should be organized in a file so that it can be retrieved at any time. Ideally, you’ll also keep a record of
internal control procedures that specifies who in your company can access and authorize payments,
orders, and other transactions.

Source Document Format

In most cases, photocopies of source documents are acceptable legally, which means source documents
can be stored electronically and the originals destroyed. The IRS has accepted photocopies of receipts
since 1997 as long as they’re legible and contain all of the information present in the original. Many
businesses and government agencies also use the IRS standard of complete, legible, and accurate
reproductions of original documents. However, other institutions may add to these general
requirements.

Length of Time to Retain Source Documents

Generally, source documents should be kept as long as they serve a useful purpose or until all legal and
regulatory requirements are met. Businesses often base how long they keep files on the length of the
statute of limitations for breach of contract or fiduciary duty, and professional liability claims. You
should always keep receipts, bank statements, invoices, payroll records, and any other documentary
evidence that supports an item of income, deduction, or credit shown on your tax return for at least six
years.
Bottom Line

A source document is an original document, such as an invoice or a canceled check, which contains
essential details that will either support or substantiate a transaction. It doesn’t have to be a paper
document, as electronic records are acceptable too. Depending on the nature of your business, the
types of source documents that you need to retain will vary.

About the Author

Tim Yoder

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Tim Yoder

Tim worked as a tax professional for BKD, LLP before returning to school and receiving his Ph.D. from
Penn State. He then taught tax and accounting to undergraduate and graduate students as an assistant
professor at both the University of Nebraska-Omaha and Mississippi State University. Tim is a Certified
QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor for both the Online and Desktop
products, as well as a CPA with 25 years of experience. He most recently spent two years as the
accountant at a commercial roofing company utilizing QuickBooks Desktop to compile financials, job
cost, and run payroll.