So you have just started you new business or perhaps you have been going for a while now… And someone mentions ‘Source Documents’ to you. Do you know what a source document is and why you need them, do you know how long you need to keep them for?? Yes, Sort-of…. Okay, lets break it down for you.
What is a Source Document?
“A source document is the original record containing the details to substantiate a transaction entered in an accounting system.”
Types of Source Documents
- Invoices to customers or from suppliers
- Receipts for purchases or sales
- Credit Notes
- Cheque & Deposit Books
- EFTPOS and/or Credit Card Chits
- Bank Statements
- Purchase orders
- Hire Purchase Agreements
- Loan Documents
- Sale & Purchase Agreements
- Petty Cash Book
Why do you need to keep source documents?
Source Documents are important for many reasons, firstly that they allow you to enter the transaction accurately into your accounting system. Secondly, source documents provide a document as proof of a transaction and the amount etc. for example if a supplier sends you an invoice for goods that you have already paid cash for. The receipt can be shown as proof to the supplier to show that you have in fact paid for the goods. Thirdly, EFTPOS or Credit Card Chits are also essential to have if your Merchant (e.g. bank) has a query come through from the credit card company, you need to provide details of transaction including the chit and receipt showing what the purchase related to.
Source documents also have an important accounting function if your business needed to be audited (either by the IRD or for other reasons). An auditor will select transactions at random and check that you have the source documents to prove that the transaction actually took place, and that it has been entered correctly into your accounting system.
How long do you need to keep these documents for?
In New Zealand the Inland Revenue Requires that you keep all Financial Records (including source documents) for at least 7 years. It is a great idea to add these all into a single box for each year, so the details are easy to find if you need to access them.