Source documents for accounting transactions

A company’s everyday activity can involve various transactions, such as the purchase or sale of goods or services, payments to staff, receiving or granting of loans, payment of taxes, penalties and loan interests. In accounting, any commercial action by a company is to be duly formalized as a bookkeeping entry.

Types of source documents

The phrase “source documents” is a bookkeeping term encompassing all types of documents produced as a result of business transactions with legal force. These include:

  • Invoices
  • Sales receipts
  • Bank statements
  • Payment system statements
  • Sales and purchase agreements
  • Annexes to agreements and acts, statements or certificates
  • Delivery notes and loading sheets
  • International waybills
  • Inventory reports
  • Court judgments
  • Loan agreements
  • Employment agreements
  • Administrative orders and other documents.

A source document, as a proof of a transaction, must contain all information on the nature of the transaction, the parties to the transaction as well as the time or period when the transaction was made. On the basis of a source document, the Estonian Tax and Customs Board can identify the facts of the transaction made and assess whether or not the transaction is related to business activity.

To avoid any tax risks, all documents are to be duly issued and all costs related to business activity are to be confirmed by valid source documents.

For example, in a situation when a document supporting a transaction is missing or does not comply with the requirements stated in the Estonian Accounting Act, this may result in a tax risk, i.e. the necessity of paying income tax on the sum paid or on the amount of expenditure, which might have been avoided if the duly issued source document supporting the transaction had been available.

The source document must contain, at the minimum, the following data:

  • The date of the transaction
  • A description of the economic substance of the transaction
  • The figures relating to the transaction, e.g. quantity, price and total amount

An accounting entry is to be made on the grounds of a source document or a set of source documents supporting the transaction. A source document can be composed of and the transaction can be supported by several documents e.g. a sale and purchase agreement, a delivery note, invoice, CMR waybill, payment order or bank statements. An invoice can be relative to or act as an annex to the agreement.

For example, in the case when an invoice indicates “Legal services according to the agreement”, with the agreement for rendering the said services not being available, the tax manager may consider the transaction not to be supported and tax risks may arise.

Issuing invoices

When issuing invoices to customers, it is necessary to proceed by heeding the requirements applicable to source documents. It is also necessary to control all incoming invoices in order that they comply with the requirements applicable to source documents.

Invoices issued to natural persons

Invoices issued to natural persons must contain, at the minimum, the following data:

  1. A description of the economic substance of the transaction
  2. The date or period of sale or purchase of the goods or service
  3. The figures relating to the transaction, i.e. quantity, price and total amount

Invoices issued to legal persons

Invoices issued to legal persons must contain, at the minimum, the following data:

  1. A description of the economic substance of the transaction
  2. The date or period of the sale of the goods or service
  3. The figures relating to the transaction, i.e. quantity, price, total amount
  4. The seller’s data (the name of the company, registration code and VAT number if available).
  5. The customer’s data (the name of the company, registration code and VAT number if available).
  6. The document title (invoice, pro-forma invoice, credit invoice) and its reference number

Those are the minimum requirements for source documents. The documents may include more but no fewer data than that stated.

Invoices issued by VAT-registered companies

Since a VAT-registered company must keep records on VAT accounting, on issuing invoices the company must comply with the special requirements that include 10 clauses stated in the Estonian Value-Added Tax Act.

The following must be set out in the invoice:

  1. The invoice reference number and its date;
  2. The name and address of the company and its VAT number;
  3. The name and address of the acquirer of the goods or the recipient of services
  4. The VAT-number of the acquirer of goods or the recipient of services;
  5. The name and description of the goods or services;
  6. The quantity of the goods or extent of the services;
  7. The date of the dispatch of the goods or provision of the services or the date of the receipt of full or partial payment for the goods or the services if the date can be precisely determined and if it differs from the date of issue of the invoice;
  8. The VAT-exclusive price of the goods or services, as well as any discount, if that is not included in the price;
  9. The VAT-rated taxable amount together with the applicable rates of the VAT, or the amount of the goods or services that are VAT-exempt;
  10. The amount of the VAT payable indicated in EUR.

Source documents in e-commerce

The development of e-commerce and the use of alternative payment systems have resulted in new types of source documents coming into use. In e-commerce, software usually automatically generates invoices for customers. In such circumstances, files with thousands of transactions can be directly exported into accounting software.

However, the merchant’s online platforms may not generate commercial invoices, but only provide sales statistics and reports. Reports generated by a payment system do not contain information on the product sold or the service rendered (quantity, description, price, amount), but reference a particular transaction number relating to the order, a particular invoice or sales statistic. In such a circumstance, source documents will be represented by reports issued by the payment systems, sales statistics and inventory reports issued for the goods, on the basis of which the accounting records can be made.

It is necessary to note that the minimum requirements of source documents apply to all document types.

Bookkeeping

The company’s accountant must check that each source document contains all necessary details. Additionally, they must carry out an arithmetical check of the data contained within each document before it can be registered as accepted for recording, and entered into the accounting software with the accounting entry number to be marked on the document.

All documents (invoices, sales receipts, delivery notes and loading sheets, agreements, accounting policies) must be preserved for 7 years. This period is based on the Estonian Taxation Act, which stipulates that a company in Estonia must preserve their documents relating to transactions and payments along with other documents that are important for tax purposes. Special requirements are applied to documents and employment agreements related to e-commerce, which must be preserved for 10 years.