Why is a memorandum used as the source document when supplies are bought on account?

Each time a company makes a financial transaction, it generates some paper trail. Accountants call this paper trail a source document or documents. If a small business writes a check from its checking account for office supplies, for example, the check and office supplies receipt become the source documents.

Importance of Source Documents

The source document is essential to the bookkeeping and accounting process as it provides evidence that a financial transaction has occurred. During an accounting or tax audit, source documents back up the accounting journals and general ledger as an indisputable transaction trail.

You would keep source documents for your business just like you keep receipts for tax-deductible items for your taxes. If your taxes are audited, the source documents provide the proof that you've made those purchases. The same holds for your business, but in business, you keep original documents for every financial transaction, not just charitable donations.

Important Data and Facts

A source document describes all the basic facts of the transaction, such as the amount of the transaction, to whom the transaction was made, the purpose of the transaction, and the transaction date.

Common source documents include:

• Canceled checks
• Invoices
• Cash register receipts
• Computer-generated receipts
• Credit memo for a customer refund
• Employee time cards
• Deposit slips
• Purchase orders

Storing Your Documents

The source document's information should be recorded in the appropriate accounting journal as soon as possible after the transaction. After recording, all source documents should be filed away in some system where they can be retrieved if and when needed. In certain instances, it may even be important to provide the chain of custody to be able to determine that the source document in question remained under your control.

Originals vs. Photocopies

In most circumstances, photocopies of source documents are legally acceptable. The Internal Revenue Service, for example, has accepted photocopies of receipts since 1997, so long as they are legible, contain all the information present in the original, and, within the limits of the scanning process, present that information in a format identical to the original.

A materials receipt that specified the objects purchased and the price paid, but that was scanned without the name of the supplier would not qualify. A document that presented all the information in the original receipt, but that had been retyped in Word or Excel format would also not qualify.

Many businesses and government agencies also use the IRS standard of complete, legible, and accurate reproductions of the original documents. Other institutions, however, may add to these general requirements.

The University of Washington, for instance, only accepts, as substitutes for the original document, photocopies scanned at a minimum density of 300 dots per inch (dpi) and presented in either PDF or TIFF formats; it does not accept JPEG photocopies.

If you plan to scan accounting or legal documents to facilitate storage, check with the relevant institution to be sure they will accept the documents in the format you're planning to use.

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