Accounting and Finance Foundations

Unit 5

Accounting and Finance Foundations Unit 5: Accounting Terminology 416

Accounting Terminology

Chapter 15

Student Guide

Lesson 15.1 Source Documents

Before understanding the use of source documents, there must first be an understanding of the difference

between accounts receivable and accounts payable. Accounts receivable is when a customer charges on

account with a business. A transaction that says “sold on account” indicates the use of an accounts receiv-

able account. Accounts Receivable is an asset account because money is owed to the company and will be

collected at a later date.

Accounts payable is when a company buys something on account from some other entity and will pay at

a later date. The company that is selling something thus becomes a vendor. Accounts Payable is a liability

account because money is owed and must be paid at a later date.

A business paper from which information is obtained is called a source document. Source documents

prove a transaction occurred. The accounting standard objectivity is applied when source documents are

prepared for a transaction. A transaction should be journalized only if it actually occurs.

For example, if a company is awarded a large contract to build an office building for $1 million dollars, the

transaction should not be recorded in one lump sum, but rather divided over time according to the work

that is actually being done. The amounts recorded must be accurate and true. Nearly all transactions result

in the preparation of a source document.

Examples of source documents include:

n check stubs

n calculator tapes

n memorandums

n purchase orders

n invoices

n receipts

Check: A business form ordering a bank to pay cash from a bank account. The source document for cash

payments is a check.

Your Company Name Here

123 Anystreet

Sometown, AK 10113

901-555-3446

3537

003537

Your Financial Institution123 Anystreet

Sometown, AK 10113901-555-3446