What is a business paper from which information is obtained for a journal entry?

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.

Was this page helpful?

Thanks for your feedback!

Tell us why!

Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

A journal entry records a business transaction in the accounting system for an organization. Journal entries form the building blocks of the double-entry accounting method that has been used for centuries to keep financial records. They make it possible to track what a business has used its resources for, and where those resources came from. 

The double-entry accounting method requires every transaction to be recorded in at least two accounts. For example, when a business buys supplies with cash, that transaction will show up in the supplies account and the cash account. Before we get ahead of ourselves, let’s start with the basics.

What is a Journal Entry Used For?

In the age of automated accounting software, it can be easy to forget the role of the humble journal entry. In the day before all this automation, entries were made manually into journals, which may have been Excel sheets but at one point were actual physical books of paper (like a journal!)

Accounting journal entries are used to record financial transactions in the accounting system, and would be transferred from the journals and posted to the general ledger. While most of this process happens behind the scenes in modern accounting software, it’s important to know what’s going on and there are times when manual entries will need to be made to correct or adjust account balances at the end of an accounting period. 

What to Include in a Journal Entry?

One important key to journal entries is that they need to contain enough information to clearly reflect the actual transaction. That way, instead of only having account balances, we can look back at journal entries to see what really happened and if anything was recorded incorrectly.  

A journal entry has the following components:

• The date of the transaction
• The account name and number for each account impacted 
• The credit and debit amount
• A reference number that serves as a unique identifier for the transaction 
• A description of the transaction

Under the double-entry bookkeeping method, debits and credits in a journal entry must be equal. Journal entries must also be consistent with the general accounting equation which describes the balance sheet:

Assets = Liabilities + Owner’s Equity

Using this equation, debits are recorded on the left, and credits on the right. This means that debiting an account on the left side of the equation — an asset account — increases that account. Debiting an account on the right side of the equation — a liability or an equity account — will decrease the balance in that account. 

A credit amount has the opposite effect. Crediting an asset account decreases the balance, while crediting a liability or equity account increases it. Over on the income statement, revenue accounts are increased by credits, and expense accounts are increased by debits. 

The combination of the accounting equation and the actions of debiting or crediting an account means that the different categories of accounts will normally have either a debit balance or a credit balance. This chart shows how that works: 

Account Type

Asset

Debit

Liability

Credit

Equity

Credit

Revenue

Credit

Debit

Let’s walk through a couple of examples. On January 10, 2020, Sally ordered $238.87 worth of office supplies from OfficeMart. When the supplies are delivered, she also receives invoice number 4987 from OfficeMart. Payment on that invoice is due in 14 days. 

Here’s the journal entry to record the receipt of the supplies and the related payable:

Reference number: 2396
Date: 1/10/2020
Office Supplies (account 6390)      $238.87
Accounts Payable (account 2100)                   $238.87
To record payable for invoice 4987 from OfficeMart

Two weeks later, Sally pays the invoice:

Reference number: 2577
Date: 1/24/2020
Accounts Payable (account 2100)  $238.87
Cash (account 1010)                                          $238.87
To record payment on invoice 4987 from OfficeMart

 On January 12, Sally completes a consulting project for Ace Design, Inc. and sends out invoice number 21095 for $2,560.00:

Reference number: 2401
Date: 1/12/20
Accounts Receivable (account 2100) $2,560.00
Revenue (account 4101)                                           $2,560.00
To record invoice 21095 for Ace Design, Inc.

Two days later, she receives payment on that invoice: 

Reference number: 2489
Date: 1/14/20
Cash (account 1010)                             $2,560.00
Accounts Receivable (account 2100)                   $2,560.00
To record payment on invoice 21095 from Ace Design, Inc. 

For centuries, bookkeeping was done with paper and pen. Business transactions were recorded in specialized journals or ledgers. For example, sales would be recorded in a sales journal and payroll would be recorded in a payroll journal. A summary of those transactions was periodically posted to the correct general ledger account as part of the accounting cycle. Journal entry accounting was the only way to enter data into financial records.

But with accounting software, transactions like those above are automatically entered in the correct accounts as invoices are created, customer payments are processed and bills are paid. This means that accountants today make comparatively few journal entries. Accounting software also makes it possible for small business owners to do their own bookkeeping.

The few journal entries that still need to be made are mostly for accruals at the end of a period or to adjust to GAAP-basis accounting. Non-cash transactions like depreciation and amortization may also require journal entries.

In today’s accounting software, the specialty journals of yesteryear exist as modules in the software. For example, a payroll module allows employees to be paid and facilitates the preparation of payroll tax reports. However, these separate modules are largely invisible to users: all transactions will appear as if they were entered in the general ledger. 

Journal entries come in different flavors, depending on their format and function within the accounting cycle. They may be used to adjust or reverse another entry or account balance or may be used to directly enter information like depreciation or amortization that accumulates during the month. Here are a few examples of the different types and how they look:

Examples of Journal Entries

General journal entries are recorded directly in the general ledger, and not via a special module or automatically as invoices or cash receipts are processed. An example is an entry to record depreciation expense:

Reference number: 9902
Date: 12/31/20
Depreciation expense (account 6401) $10,500.00
Accumulated depreciation (account 1515)              $10,500.00
To record annual depreciation expense

Compound journal entries record transactions that impact more than two accounts, and can be quite complex. Here’s a simple compound entry to record the purchase of machinery with a cash down payment and a bank loan:

Reference number:5432
Date: 4/10/20
Machinery (account 1510) $275,000
Cash (account 1010)                               $25,000.00
Bank loan (account (2358)                    $250,000.00
To record purchase of new machinery

Adjusting journal entries are generally used to allocate income or expenses to the correct period for GAAP-basis financial statements. When payroll periods don't match the last day of the month, adjusting entries match the incurred expense to the correct period. For example, let’s say that $3,000 in payroll expense has been incurred through the end of December:  

Reference number:5953
Date: 12/31/20
Payroll expense (account 6780) $3,000
Accrued payroll (account 2780)              $3,000
To record accrued payroll for year-end

Reversing journal entries are used to reverse one or more adjustments made in the immediately preceding period to accrue income or expenses. These can make the accounting simpler, while still keeping income or expenses in the correct periods. Here’s how the adjusting journal to accrue payroll expense would be reversed in the next year:

Reference number: 6003
Date: 1/1/21
Accrued payroll (account 2780) $3,000
Payroll expense (account 6780)              $3,000
To reverse payroll accrued at 12/31/20

Tracking Journal Entries

When creating journal entries manually, you need to track which entries relate to which transactions as you post items to the general ledger. This is the only reliable way to find the source if something is off and you need to verify a number to ensure accurate financial reporting. 

For tracking purposes, t-accounts are often helpful. They show the account in questions in the form of a T, with the account name in the header above the horizontal line of the T, and the vertical line dividing debit and credit columns to left and right. It’s a simple template that lets you visualize the transaction. 

For example, if the loan is taken out for $10,000, the t-account for Notes Payable, would show a credit of $10,000 into the payable account, as well as a debit of $10,000 which would be marked Cash. 

Each of these journal entries would then be manually posted to the general ledger. If you’re thinking that sounds like a lot of work and a lot of opportunities for errors, you’re right. That’s where technology comes in to make our jobs easier.

The examples here are pretty simple, but imagine how easy it would be to make mistakes if you had to rely on manual journal entry accounting to get data into the general ledger. Numbers get transposed, addition and subtraction errors creep in, plus finding those mistakes is nearly impossible. 

Accountants and bookkeepers who fully leverage the automation in today’s accounting systems by using bank feeds and imports from various apps save time and improve accuracy. This speeds up the accounting cycle, and makes it possible to provide small business owners with accurate and complete financial statements in almost real time. 

And here at FloQast, we’re always in favor of automation that helps accountants get their work done faster and more accurately! 

Michael Whitmire

As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.

What is a business paper from which information is obtained?

What do you call information for each transaction recorded in a journal?

Which document is used as a source for recording to the sales journal?

What is a business form ordering a bank to pay cash from a bank account?