Author: Kristiine Villemi
Often accountants face the question: “What is and what isn’t a source document from the standpoint of accounting, and is a source document always necessary, for example at a one-man company?”
Every accounting entity is required to post and record all its business transactions in accounting ledgers and journals on the basis of source documents or summary document prepared on the basis of source documents (Accounting Act section 4). This means that the basis of every ledger and journal entry must be a document certifying a business transaction, and the document must meet the requirements of legislation.
Under Section 7 of the Accounting Act, the following must be contained in an accounting source document that certifies a business transaction: the date of transaction, description of the economic content and figures (e.g. quantity, price and amount). If the business transaction is one for which an invoice is presented to another accounting entity, the source document should also include, in addition to the above-mentioned, the invoice number or other identifying feature and data that allow the transaction parties to be identified. These are the minimum requirements.
Additional requirements for VAT payers
Additional requirements apply to VAT payers when it comes to drawing up invoices. These are set forth in Section 37 of the VAT Act. Thus, if the issuer of the invoice is a VAT payer, it must make sure that all of the requirements in Section 37 of the VAT Act are followed. The invoice need not conform to the requirements of the VAT Act if the goods are transferred or the service is provided to natural persons for personal purposes, not including distance sales, transfer of a new vehicle and export of goods sold to a natural person outside the Community. The same is true for receiving invoices – the VAT payer must make sure that if the submitter of the invoice is a VAT payer, the additional requirement in the VAT Act are complied with so that the input VAT Is declared accordingly. For example, besides the name, a VAT payer must be sure to record not just its own but also the transaction partner’s address and VAT payer registration number.
A person engaged in enterprise who is not a VAT payer must ensure that the invoice comply with at least the minimum requirements in the Accounting Act.
It is also important to know that a reference to the source document or summary document (e.g. the invoice number) must be added to the entry when entering the transaction into ledgers. The requirements established for source documents also apply to summary documents prepared on the basis of the source document.
Bank statement does not replace the receipt of sale
Based on the above, a bank statement may not be used to fill in for a receipt of a purchase made by bank card as the entries do not contain the information set forth in the legislation for source documents (e.g. economic content of the transaction). As an accounting source document is a certificate, the form and content of which must, if necessary, enable a competent and independent party (such as a tax authority or auditor) to prove the circumstances and authenticity of the business transaction, a handwritten explanation on paper is likewise not a suitable source document.
If a company has made disbursements for which a source document complying with the requirements of legislation does not exist, the company must pay income tax pursuant to the requirements of Section 51 of the Income Tax Act, as an expense cannot be a legitimate business expense in the absence of a correct source document conforming to the requirements of legislation.
Although the management board is responsible for the correctness of accounting and decides what to claim as a business expense and on what basis, it is the professional ethical obligation of every accountant to always draw the management board’s attention to the requirements of legislation.