Source documents are your original financial records, which are mainly gross receipts, purchases, expenses, assets, employment taxes, packing slips, canceled checks, and employee time cards. Their foremost aim is to support your book-keeping services transactions.
Benefits of Keeping Source Documents in Accounting
If you keep an archive of your source documents, then your book-keeper or accountant can utilize them in proving the legitimacy of your financial entries.
You can have your source documents in hard or soft copy, the things which matter the most are:
- You have a secure and organized system for your source documents.
- All the measures have been taken by you to make book-keeping services entries on time & with accuracy.
- There should be easy retrieval of the documents when your book-keeper asks for them.
- The documents saved by you should be complete and you must possess the original copies of the documents.
Why Should You Possess Source Documents for Tax Purposes?
As per the IRS guidelines, you must have a business supporting records and they should be kept with you for at least two years at the minimum.
The documents defined by IRS are related to an item of income, deduction or credit shown on your tax return.
There is a possibility that your business could get selected for a tax audit in any given year, so always keep a record of the documents with you. If your business gets into an audit, then during the process, there will certainly be a proper investigation by the tax auditors. They come straight from the government institutions.
What will happen during the audit? In the process, the tax investigators will thoroughly examine every document of yours. The main emphasis will be on income & deductions, which you have recorded on your source documents. Because this is typically accomplished by examining a representative portion of your accounting transactions, part of the auditor’s investigations will also include scrutinizing related source documents.
Essential Details on Your Source Documents in Accounting
There are essential details which must be on your source documents. Here they are:
- A proper amount of the transaction should be mentioned.
- The transaction date it occurred on should be visible clearly on the document.
- Name of all the parties who had participated in the transaction.
- The reason should be clearly mentioned as to why the transaction was made.
Although, IRS has clearly mentioned that you must keep the documents for a minimum of 2 years.
- The foremost reason behind this motive is that you can claim refunds or credits which you have missed from your end.
- The second reason is that the IRS is always busy during the tax season, so they have the appropriate time to examine documents of every business.
More Benefits of Source Documents
A smart business strategy is that you must keep your source documents, accounting & financial records – not only for tax season, but because you may need them in the future.
When you go for an acquisition, merger or sale – there is always a proper examination of both the parties’ documents – seller and buyer – before coming to any decision. Every accounting service and its transaction is done by your business lays a foundation for accurate financial records. Should you ever reach the point where it makes good business sense to join forces with another organization – or to leave your company behind altogether – you’re far more likely to meet your objectives if your records are intact, up to date, and accessible.
Here we take an example. Suppose your long-term plan is to sell the business. Then, the potential buyers will have an eagerness to know more about your company’s finances. If the sale is big, then it would require you to open your books, so that the interested parties can look into it, and investigate your profitability. Also, they will be able to forecast the future revenue of your business. You have to be open about your past tax returns, all the business assets & liabilities, cash flow statements, profit & loss statements, and balance sheets.
In the past, the more firm your company’s accounting is, the more useful it will become in the present and future.
Opportunities (planned or unplanned) are always there – as a businessman always keep an eye on them, and if possible & feasible, trap them. Make sure you always have source documents of the trapped opportunities. So, this will assist book-keepers in preparing future financial statements; keeping financial housekeeping in order. Next time if you get impatient with your book-keeper for missing a receipt, it’s better to keep a record of every source document in advance. This becomes a solid investment for the company, as it will save time and cost to the business.
Whatever legitimate business you are in, always keep source documents in a secured and organized way. Because you don’t know when you can get a notice from the tax authorities.
Source documents not only help in keeping accurate records but also scrutinized by the tax investigators during the audit time.
Here, at Accounts Confidant since you are an entrepreneur, you have to deal with a number of tasks on a daily basis which includes bookkeeping services, so when it comes to the need of source documents by your book, if in case you seem to be interested in finding out more and have further queries regarding this topic, please feel free to contact our team of experts here at Accounts Confidant by calling us today on our toll free number +1-888-660-0575.