- A source document shows all the information about the legal rights a company has in relation to when it should pay a bill.
- A source document identifies and describes transactions and is the basis for entering an event into the accounting system.
- A source document is used to determine who hired an employee that is assigned the duty of entering transactions into the accounting process.
The correct answer is:
“A source document identifies and describes transactions and is the basis for entering an event into the accounting system.”
Explanation of Correct Answer:
A source document in accounting is the original record that provides evidence of a business transaction. Examples include invoices, receipts, purchase orders, bank statements, and contracts. Source documents serve as the foundation for recording entries into the accounting system and provide a clear audit trail for verifying the accuracy of financial records.
Key Features of a Source Document:
- Identification of Transactions: It specifies details such as the date, amount, parties involved, and nature of the transaction.
- Verification of Accuracy: Serves as proof that the transaction occurred, making it an essential component of the audit process.
- Basis for Recording: Transactions cannot be recorded without evidence from source documents, ensuring reliability in financial reporting.
Why the Other Options Are Incorrect:
- “A source document shows all the information about the legal rights a company has in relation to when it should pay a bill.”
- Incorrect because source documents are not limited to payment-related legal rights. They encompass a broader range of transaction types, such as sales, purchases, or receipts.
- “A source document is used to determine who hired an employee that is assigned the duty of entering transactions into the accounting process.”
- Incorrect because source documents do not involve hiring or human resource management. They strictly pertain to recording financial transactions.
Why Readers Can Trust This Answer:
This definition is supported by accounting frameworks like Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), both of which emphasize the importance of documentation for reliable financial reporting. Textbooks on accounting principles universally define source documents as foundational records for all accounting entries.
