Documentary proof of business transactions recorded in the accounting system is known as supporting documentation.
In previous chapter, we have discussed that bookkeeping is a part of accounting which is concerned with recording business transactions through journal entries and posting those entries in relevant ledger accounts. Another important part of bookkeeping is maintaining supporting documentation for all the recorded business transactions in an organized way so that financial information is readily verifiable.
In most of the cases, business transactions have some source documents such as purchase invoices, quotations, purchase orders etc. in support of purchases; sales order, sales invoice, delivery challan etc. in support of sales; office rent agreement in support of office rent expense etc. Accountants should keep such source documentation for all such business transactions.
However, in some cases, there is no source documentation as proof of transactions, for instance, exchange gain or loss on foreign currency held by an entity is recorded based on calculation made by an accountant. Similarly, there will not be an invoice or agreement to back up the impairment of fixed assets, which is recorded based on some workings of recoverable amounts of fixed assets. In such cases, the accountants should keep the workings, inter-office memos, or notes etc. as supporting documentation for such transactions.
Supporting documentation should be maintained by the accountants or bookkeepers in an organized manner so that when needed to verify a transaction, it can be readily extracted and reviewed. Usually, documentation related to each transaction is given a unique number and is cross referred to the voucher number or entry number through which the related transaction is recorded in the accounting system. Documents of current year are usually kept at the office whereas documents of previous years are archived and stored at some other location for effective utilization of space.
Advantages of supporting documentation
- It makes the financial information verifiable, which is one of the characteristics of useful financial information.
- External audits are required everywhere now a days, and supporting documentation is a must for auditors, as they verify the transactions from documentation.
- Supporting documentation helps in dealings with business partners, customers, and vendors, as it is written proof of the terms agreed and can be referred to in case of any confusion or disagreement.
- In case of any dispute or legal proceedings, supporting documents can provide useful evidence of the facts and can be referred to for preparing the arguments for the legal proceedings.
- Revenue Authorities and tax collection authorities can also require supporting documents for selected transactions and every jurisdiction has its own law stipulating the period for which supporting documentation has to be retained.