Which of the following is the best definition of a source document in the accounting process multiple choice question?

June 10, 2022 June 10, 2022/ Steven Bragg

Source documents are the physical basis upon which business transactions are recorded. Source documents are typically retained for use as evidence when auditors later review a company's financial statements, and need to verify that transactions have, in fact, occurred. They usually contain a description of a business transaction, the date of the transaction, a specific amount of money, and an authorizing signature. Many source documents are also stamped to indicate an approval, or on which to write down the current date or the accounts to be used to record the underlying transaction. 

A source document does not have to be a paper document. It can also be electronic, such as an electronic record of the hours worked by an employee, as entered into a company's timekeeping system through a smartphone.

Examples of Source Documents

Examples of source documents, and their related business transactions that appear in the financial records, are noted below.

Bank Statement

A bank statement contains a number of adjustments to a company's book balance of cash on hand that the company should reference to bring its records into alignment with those of the bank.

Cash Register Tape

A cash register tape can be used as evidence of cash sales, which supports the recordation of a sale transaction.

Credit Card Receipt

A credit card receipt can be used as evidence for a disbursement of funds from petty cash.

Lockbox check images support the recordation of cash receipts from customers.

Packing Slip

A packing slip describes the items shipped to a customer, and so supports the recordation of a sale transaction.

Sales Order

A sales order, when coupled with a bill of lading and/or packing list, can be used to invoice a customer, which in turn generates a sale transaction.

Supplier Invoice

A supplier invoice is a source document that supports the issuance of a cash, check, or electronic payment to a supplier. A supplier invoice also supports the recordation of an expense, inventory item, or fixed asset.

Time Card

A time card supports the issuance of a paycheck or electronic payment to an employee. If employee hours are being billed to customers, then it also supports the creation of customer invoices.

For example, a company is in the consulting business. it accumulates hours-worked information from employee timesheets, which is then included in customer invoices that in turn result in the creation of a sale and accounts receivable transaction. Thus, in this situation, the timesheet is the source document for a sale transaction.

Controls Over Source Documents

There are a number of possible controls that can be used to reduce the risk that source documents are not properly recorded in an accounting system. One of the more common controls is to pre-number documents, so that missing documents are easier to track down. Another control is to reconcile the balances in accounts to the supporting source documents to see if either some documents have not been recorded, or if some transactions recorded in the accounts do not appear to have any supporting source documents.

How Long to Retain Source Documents

Various regulations mandate that some source documents be retained for a number of years. It may also be prudent to retain these documents irrespective of regulations, if only to provide evidence in the event of a lawsuit, or to provide better customer service. For these reasons, a company should adopt a document destruction policy that strictly controls the shredding or other form of elimination of source documents until a certain number of years have passed.

June 10, 2022/ Steven Bragg/