Are source documents in accounting important?
Did you know that your business may possess thousands of source documents you are not even aware of? If you fail to manage these documents properly, you could be missing out on important tax deductions. Unorganized financial records can also lead to overspending, as well as put you at risk during an audit. Keeping track of source documents can seem tedious, but it is important to learn why they are vital to your business.
What are source documents?
Whenever a business makes a financial transaction, it creates a paper trail. This paper trail is known as a source document. For data verification and accurate recording of transactions, your bookkeeper or accountant may request a source document. An excellent source document should describe all the basic facts of the transaction, including the date, the amount, the purpose, and all parties involved.
The following are examples of source documents:
Bank Statements
Payroll Reports
Invoices
Leases and Contracts
Checks
Receipts
Purchase Orders
Credit Card Statements
Invoice for Sales of Goods
Source documents provide good internal controls and serve as proof that a transaction took place. By promptly supplying your accountant or bookkeeper with source documents, they will be able to prepare your financial statements and accurately analyze your business activity.
Why are source documents important?
The accounting and bookkeeping practices are influenced by your source documents. Not only can you better prepare for an audit, but also improve the accuracy and efficiency of the bank reconciliation process.
Easier audit preparation
As a business owner, you have to prepare for government audits. While an audit is nothing to worry about, trying to run a business while collecting documentation can keep you on your toes for weeks.
The requirements for auditors may not be fulfilled if there are no source documents matching transactions in the reconciled statements, potentially creating major problems for your business. In case of an audit, make sure to keep all receipts, invoices, and bills as a part of your bookkeeping best practices.
Efficient bank reconciliation
Some businesses forget to record credits and debits. As a result, the ledger's numbers will not be consistent with the account statement. If your statement does not reflect an accurate description of the transaction, finding the problem can be a hassle. Having all your source documents at hand, however, can result in a more efficient system.
Your receipts, invoices, and bills will always be at your fingertips if you manage them properly, resulting in a simplified and faster bank reconciliation process. A corresponding document will be associated with each bank or credit card transaction, so you can clear out each item in detail in the books quickly and accurately.
It can be challenging to manage all the different types of source documents. To learn more about how C.CAMPBELL AGENCY can help organize your receipts, invoices, and more, please contact us today.