Source Records in Accounting

Everything has a starting point and when it comes to accounting, source records are it! In this tutorial, you’ll learn about the different types of source records in accounting, find out what each one means and discover how they fit into the accounting process.

Source records are sometimes referred to as business documents, but they mean the same thing.

Table of Contents

1. What are Source Records?

Financial statements are built from the financial transactions that happen in a business and for each one of these, there will be a document with information on it to explain what has happened. These documents are known as source records, the foundations of every number included on a set of financial statements.

Think about when you buy something online, you’ll always be emailed a receipt and that receipt is a record of your transaction with that business. That business will also have a copy of your receipt so they know to include as part of their sales, which ultimately gets included into turnover in their accounts.

Source documents matter because they are what is used to make bookkeeping entries which ultimately get bought together to build financial statements. And if they aren’t collated in organised and consistent manner transactions may be missed out, meaning the financial statements may have errors.

2. Types of Source Records in Accounting

Her are the most common types of source records you should be aware of and need to have to start bookkeeping:

2.1 Quotation

A quotation is a document sent to a customer in which a business sets out the price of goods or services before starting work. Typically it includes essential information such as exclusions, time scales as well as price and it normally cannot be changed once accepted by the customer.

2.2 Purchase Orders

A purchase order is a document issued by a business buying a product or service. It is sent to the supplier it is buying from containing details of the product or service they are buying including the cost. It’s a type of contract sent by a buyer that sets out the basic terms of what they have agreed to buy.

2.3 Sales Orders

A sales order is a document issued by a business with details of an order placed by a customer. It helps a business keep track of orders placed, which can be useful when managing budgeting, cashflow and delivery.

2.4 Goods Received Notes

A goods received note is a document that details a list of products delivered by a supplier. They are most common in the manufacturing industry normally when goods are delivered into a warehouse.

2.5 Goods Dispatched Notes

A goods despatched note is a document on which a business lists goods it has sent to a customer. Again, they are commonly used in manufacturing industries so they can check that goods are sent out correctly and to keep a record of what is left the premises.

2.6 Invoices

An invoice is a legal document sent out by a supplier to a customer to request payment for goods or services that it has supplied. Although sales invoices can take any format or design a business chooses, there is certain information that businesses are legally required to include on depending on their legal and tax status.

2.7 Receipts

A receipt is a legal document that records a payment that has been received. These are usually used for cash sales as a way to confirm how much cash has been received.

2.8 Credit Notes

A credit note is the opposite of an invoice and it is raised to reduce the amount a customer has been billed. If the customer has not paid the original invoice then the credit note is normally set off against the outstanding invoices and net amount paid. If the customer has already paid the invoice, raising a credit note can mean that the business needs to make a refund to the customer for the credited amount.

2.9 Remittance Advice

A remittance advice is a document issued by a customer when they pay a sales invoice which normally shows:

  • Their details
  • Date of payment
  • Invoices numbers they are paying
  • The total amount being paid

Remittances are useful when it comes to bookkeeping because it helps to correctly allocate receipts that have come into the bank account against outstanding sales invoices in the cash book.

Source Records in Accounting

3. How Are Source Records Used In Accounting?

Source records are the essential starting point in accounting because they hold all the information needed to start recording transactions. Typically the source records are organised by type – in other words all the sales invoices are bundled together, the purchase invoices, bank statements and so on.

Often there are quite robust procedures in place in a business to make sure that none are missed to avoid mistakes like forgetting a customer owes money, to pay a supplier or record an important cost against revenue. Procedures can include making one or more people responsible for certain source documents like having a team responsible for sales invoices or purchase invoices.

Once all the information has been bundled together, its time to start recording data from the source documents in dedicated books known as the books of prime entry.

Keep on Reading: Books of Prime Entry >>