Accounting documents: the ins and outs of what they are
I know you are so eager to read about accounting documents, right? Well, frankly, if you own a business, or you are thinking of opening one, you will, one day, be faced with these documents. As dreading as it may seem, we have found a way to ease that apprehension and give you the answers in the easiest of read possible.
You shall know that Appvizer’ll make sure that you leave with the knowledge of what it is, the types and how long you can retain accounting documents.
What is accounting documents?
Accounting documents and document records regroup every document that plays a role in the preparation of financial statements for a company, like income statements and balance sheets. They include records of monetary transactions, assets and liabilities, ledgers, journals, etc.
They also contain details of business transactions. When transactions are made, they’re supposed to record the key information about transactions, like the names, the amounts paid, the date and the significance of the transactions. They each (source documents) have a number that identifies them in the accounting system. It simplifies the understanding of records and helps figure whether there are any documents missing or not, as, once they have been recorded in the system, they are indexed to be easily accessible and archived.
Furthermore, they are essential for and to auditors, who utilize them as proof that payments actually happened and proof for companies’ owners. And if you have any doubts, and possess the means, an accountant can always be of a great help.
What do the source documents of accounting include?
There are a few documents to keep in mind when accounting:
- The date of the transaction: it is a date that shows when a trade has taken place, to ensure security but most importantly, indicate the time of the official ownership transfer.
- The total amount of the transaction: it means the total cost of transaction without the costs, fees and expenses in relations to the transactions.
- A description of the transaction: a transaction is a completed agreement between a buyer and a seller to exchange goods, services, etc.,
- One or more authorizing signatures: the signature indicates that everyone has agreed to the tems and conditions.
What are the types of source document in accounting?
- Cash Memo
Cash memo involves sales and purchases, which are dear to any business, and serves as source documents for them. It is the record document for every sale and purchase.
Furthermore, it is the process of recording when a company buys any goods in cash and automatically receives a cash memo from the seller.
Whereas the business that sells the goods, gives away a cash memo that shows the details of the purchase such as the quantity that has been purchased or sold, the price, discount and sales tax was collected and or deposited.
They are then recorded in the books of accounts.
- Invoice and bill
This records the credits made on purchases and sales. When the items are sold on credit, sales invoices are prepared, to details of what has been bought, the rate, amount and more. Once the purchase is made on credit, the supplier prepares the invoice.
For safety, they are made in duplicate so that each party is reminded of their duties and what is left to be paid and received. The original copy, the most important, is sent to the buyer and the latter is kept by the receiving company as record proof. It only officially becomes a bill when the recipient gets the main copy.
The receipt is proof that any transaction was made and proof that the receiving party has fully received their money. The purchaser saves it, to show it in case that any issues may arise and also keep track of their payments.
Quite like the invoice, the original copy is given to the one who makes the payment and the other is kept by the one who receives or the company that receives the cash.
- Pay in slip
It is evidence of the amount and date the money has actually been deposited in the bank. When the depositor goes to deposit the money, he or she is asked by the bank to fill out the name, date, and the amount he or she is about to deposit in the form.
Once the information has been filled in, the bank clerk verifies if everything is correct, signs and stamps it for the depositor, which becomes the record of evidence for the customer.
A check is a bank's document to pay a specific amount of money from a person’s account to the person whose name appears on the check.
There are also bearer checks, which are payments to be made to anyone who bears and presents the check, and it’s called bearer check. It is then signed by the person who issues it, signifying his or hers’ agreement to pay such amount or, quite frankly, doesn’t need a signature.
The check or cheque, if you are dealing with British customers, is a definite order directing the banker to pay a certain sum of money. The payee is the person whose details appear on the instrument.
- Debit note
A debit note shows that the company has raised debit against the receiving company, meaning increasing their asset or expense while decreasing their liability, revenue or equity. Therefore, the business making the entries is required to reduce liability to the supplier, creating the debit note to inform the supplier. A debit note can also be made by a company for the supplier who owes them for any damages.
In addition, one can even be created with the date and total of transactions, if overpayment to any party were to happen. You’d cite the name of the account of whomever the money is debited, along with the reason.
- Credit Note
It’s a credit document given by a company to a customer, a purchaser who returns a product they were not pleased with, pays too much for something, etc., which the customer might use later on to buy something else for the same value.
Vouchers are documents that are used to record payments that are owed to vendors to maintain payment history and proof. These expenses paid to vendors on behalf of clients
How long can you retain accounting documents?
Though there is no set rule, it is important for accounting to be held for at least 7 years, which is sufficient in case of any lawsuits, potential claims. Though, some CPAs recommend that you keep financial statements, budgets and more permanently.
The IRS requires all businesses to maintain adequate accounting records which are sufficient to:
• Demonstrate and explain the company’s transactions,
• Disclose at any time, the current accurate, financial position of the company; and
• Enable the business owner to ensure that any accounts required to be prepared comply with the requirements of the country, in this case the US standards.
If one forsakes their record keeping in accordance with the standards, they can face heavy penalties and going to prison.
Now, I hope that you leave here and ace the challenge that is accounting documents. Don’t forget to come back and leave a comment!