October 19, 2020

SB-Accounting

Accounting + Finance Blog

Here are 7 Functions of source documents

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In the previous lesson, a detailed definition is given on source document as well as thought out explanations. Source documents in itself serves various functions as an “evidence” that a particular transaction takes place. Let us examine these functions and importance.

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The 7 Importance of Source documents

Here are the 7 important functions of source document:

Evidence of payment: A source document shows evidence that a particular transaction or an event had occurred in the past.

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A way to explain it is from the aspect of the purchase of equipment. After buying one for the business, for management to confirm the amount actually spent, a source document must be presented by the individual responsible for buying it.

Record to the books of accounts: It is from the source documents records are made directly to the book of accounts or chart of accounts as it is called in recent times.

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In the above illustration of the purchase of equipment, a copy of the source document will be given to the cashier in charge (if bought for cash), who will record the data into the cash book.

To perform an audit trail: Source documents are used to perform an audit trail. When auditors are examining the procedures followed to arrive at a figure in a source document, the auditors will follow a trail to the source document or from the source document to the financial statement.

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It eases the job of auditors: Keeping a regular record of source documents ease the job of auditors. As explained above, auditors carry out trails on the source document of a firm. When there is no source document for a particular line item in a financial statement. This makes it difficult for auditors to form a qualified opinion.

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Future References: Source documents serve as a future reference to the business on an event that happened in the past. For example, when the evidence is required by management or other users, such a document can serve as a reference.

Avoiding fraud: An important function of the source document is its ability to form a basis for avoiding fraud. It can also be used to catch a thief. In a nutshell, it will serve as evidence that money was stolen.

It is used for control purposes: A source document can be used as an internal control tool for a business. With it, errors can be detected in the books of account. If a proper procedure of how cash and other financial resources should be handled are put in place, the source document can perform magic. Loopholes will be easily detected and the coalition to commit a crime by employees can be avoided.

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Next, the types of source documents will be discussed.

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