In accounting, all business events and transactions find a place in the final version of the accounts that are prepared by a firm. It is pertinent for an organization to maintain appropriate accounts because of which, source documents find immense importance in accounting. Let us understand the concept of business transaction and source document.
What is a Business Transaction?
A business transaction can be defined as any event that takes place in a business and holds financial value. A business transaction that can be measured in monetary terms is recorded in the books of accounts. The following are the examples of a business transaction:
- M/s ABC purchased a truck for carrying goods at a cost of INR 5, 00,000.
- Salary of INR 1,000 paid to employees
- Rent for premises paid for the month of March @100 INR per sq. ft.
Note that these transactions are easily measurable in monetary terms, which is why they are capable of being recorded in the books of accounts.
Browse more Topics under Recording Transactions
- Using Debit and Credit
- Books of Original Entry
- Posting from Journal and Cash Book
- Journal Proper and Balancing the Accounts
- Purchases (Journal) and Purchase Return Book
- Sales (Journal) Book and Sales Return Book
What are Source Documents?
Source documents in accounting terms are the physical basis or documents based on which business transactions are recorded. Source documents are typically retained for use as a medium of evidence.
Usually, auditors later review a company’s financial statements and need to verify that transactions have, in fact, occurred. This is where the role of source documents fall into place. They usually contain the following information:
- A description of a business transaction
- The date of the transaction
- A specific amount of money
- An authorizing signature
- A Quantitative field (number of hours, the quantity of goods etc)
Many source documents are also stamped by personnel, to indicate an approval, or on which to write down the current date or the accounts to be used to record the transaction. A source document does not necessarily have to be a paper document. It can also be in electronic form, such as an electronic record of the hours worked by an employee, as entered into a company’s timekeeping system.
Solved Question for You
Question: Give examples of various source documents which are used by an accountant to record a business transaction.
Answer: Some of the source documents which help in the preparation of financial accounts, are as follows:
- Bank statement: It contains a number of adjustments to a company’s balance of cash on hand that the company should reference to bring its records into alignment with those of the bank.
- Credit card receipt: This can be used as evidence for a disbursement of funds from petty cash.
- Packing slip: This describes the items shipped to a customer, and so supports the recordation of a sale transaction.
- Sales order: This document, when coupled with a bill of lading and packing list, can be used to invoice a customer, which in turn generates a sale transaction.
- Supplier invoice: This is also a source document that supports the issuance of a cash, cheque or electronic payment to a supplier. A supplier invoice also supports the recordation of an expense, inventory item, or fixed asset.