Definition: A source document, often called business paper, is the document produced with each business event and used to record every business transaction. In other words, it’s a physical or electronic document that lists the details of a transaction and is used by the accounting department to journalize accounting information.
What Does Source Document Mean?
Some common examples of source documents include sales receipts, checks, purchase orders, invoices, bank statements, and payroll reports. These are all original documents that were created from a transaction and the first component in an accounting system.
Example
Source documents are used to record transactions because they are original and show an objective report of the economic activities of each transaction. For example, when a company purchases goods from a vendor, the vendor creates a receipt or invoice that shows the goods that were purchases, the purchase price, date of transaction, seller’s name, and the method of payment. This document gives the buyer’s accounting department an objective and reliable record of the purchase transaction. It also gives the vendor a document that can used to record the sale of goods.
Source documents are also used for internal control purposes as well. For example, the manufacturing department issues a purchase requisition for the goods it needs to complete its upcoming jobs. The purchase requisition is sent to the purchasing department for approval. Once it is approved, a purchase order is issued and sent to the receiving department when the goods received are compared with the purchase order.
A receiving report is issued and all three of these documents are sent to the accounting department to approve the invoice from the vendor. If all of these documents agree, the invoice is approved and the cashier issues a check for the goods.
As you can see, all of the source documents are used to ensure that only proper goods are ordered, received, and paid for.
