The Importance of Source Documents in the Accounting Cycle

Oyinlola Somoye Written by Oyinlola Somoye · 2 min read >

We shall be examining a business transaction from the point of the business. What are Sources Documents? Invoices, Receipts, Bills, Bank Memo, Delivery notes, Credit notes just to mention a few. Now, how do these source documents come into existence for instance, in a manufacturing company you purchase your raw materials from your suppliers they issue you an Invoice and upon delivery of the raw materials you issue them with a Receipt. Both the Receipt and Invoice are called Source Documents in accounting and It is very important to have a good way of keeping our source documents.

There are various Financial Statements prepared by the Accountant in an organisation and these statements do not drop from the sky. There is a procedure for the preparation and presentation of financial statements this is called the Accounting Cycle. The first stage of the accounting cycle starts with your Source Documents, when you meet your suppliers and she supplies you she will give you an invoice and when we pay we would give the supplier receipt.

The moment you have taken a decision to enter into a transaction, we must have a viable way of something to prove. We have the Objectivity Concept in accounting which states that the accountant cannot recognize anything in the books without a verifiable evidence, the verifiable evidence is the Source Document hence, you must have a good way of keeping your source document to avoid fraud, you must drive a good data culture from top to bottom in your organization so instead of cash transactions you can do bank transfers for it to be very traceable.

You cannot prepare financial statement without source documents, your performance is driven by the quality of data, information and your capacity to make good decisions.  Once you have your source documents, you will use these documents to prepare your Journal, Journal is a chronological order of the transactions, when your suppliers supply your raw materials, you need to keep a chronological order of the transactions, if the next day, you get supplies from another supplier you need to record all these transactions in your Journal. This is why a good book keeping of your source documents is very important, it is used in the preparation of your journal. Imagine a company or an organisation with bad book keeping record of their source documents it will affect their entries into the journal.

The next stage is your Ledger, a Ledger is a book of accounts or we can call it your chart of accounts, it is a complete listing of every account in an accounting system, when you keep it manually it is called Ledger. When it is in a software it is called Charts of Account such as Quickbooks, Sage, Zoho, Wave, Freshbooks, Intacct just to mention a few. It is under the Ledger, we would have the elements of accounts such as Assets, Liability, Equity, Revenue and Expense so we could have various codes for these accounts. It is important to have a good way of keeping our source documents, you need to drive this because without data you cannot do anything, without data we cannot drive our decisions.

The next stage is your Trial Balance, we need to confirm at this stage that all debit side equal to the credit side, sometimes even if it is balanced there can still be problems instead of Chinonye we recorded Chinyere hence, we need adjustments. It is from the adjustments that we would close all our accounts and prepare the Financial Statements.

In conclusion, we can see that it is very important to keep our source documents because that is the very beginning of the accounting cycle, a poor storage of your source documents will give room for fraud and errors which at the end of the day will affect the quality of our Financial Statements.

#MBA 21

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