Expenditure Cycle: Purchases & Cash Disbursements

Chapter 5: The Expenditure Cycle - Purchases and Cash Disbursements Procedures

• Tasks in the purchases and cash disbursement process include the departments involved, the flow of transactions, the documents and journals utilized, and the risks and controls associated with these activities
• The chapter covers operational features and control implications of technology in purchases and cash disbursement systems

Objectives of the Expenditure Cycle

• Providing needed resources to the organization necessitates several objectives
• Purchasing from reliable vendors
• Purchasing high-quality items
• Obtaining the best possible price
• Purchasing only properly authorized items
• Ensuring resources are available when needed
• Receiving only ordered items
• Preventing loss, theft, or breakage of items
• Paying for items in a timely manner

Procurement Cycle Subsystem

• The procurement cycle involves several steps
• Firstly, a purchase requisition is created
• Purchasing department handles the next phase
• Goods are then received and inspected
• Accounts Payable processes invoices
• Finally Cash Disbursements are made

Manual Purchases System

• The purchases cycle starts in the Inventory Control department when inventory levels fall
• A clerk prepares a purchase requisition and sends copies to Purchasing and Accounts Payable
• The Purchasing department makes a purchase order for each vendor
• Copies of the purchase order are sent to Inventory Control, Accounts Payable, Receiving (as a blind copy), and the vendor

Receiving Department

• Upon receipt of goods, the Receiving department counts and inspects
• Blind copies of purchase orders force workers to count goods
• A worker creates a receiving report and sends copies to the raw materials storeroom, Purchasing, Inventory Control, and Accounts Payable

Accounts Payable Department

• Accounts Payable receives copies of the purchase requisition, purchase order, and receiving report
• Accounts Payable reconciles documents upon getting the supplier's invoice
• It posts to the purchases journal and records the liability in the accounts payable subsidiary ledger
• Entries in purchases journal are summarized in a journal voucher periodically
• The journal voucher is then sent to the General Ledger department

Journal Voucher and Cash Disbursements

• Accounts Payable prepares journal voucher and sends it to the General Ledger Department
• Debit: Inv-Control or purchases
• Credit: Accts Payable-Control
• Accounts Payable also makes a cash disbursements voucher and posts it in the voucher register

General Ledger Department

• It posts from the accounts payable journal voucher to the general ledger
• It reconciles the inventory amount with the account summary received from inventory control

Cash Disbursements System: Accounts Payable

• Accounts Payable searches the open vouchers payable file daily for items with payments due
• AP sends the voucher and supporting documents to Cash Disbursements and updates the accounts payable subsidiary ledger

Cash Disbursements Department

• It prepares the check and records the details in a check register, serving as a cash disbursements journal
• Paid vouchers are returned to Accounts Payable, and the check is mailed to the supplier
• Sends a journal voucher to General Ledger
• Debit: Accounts Payable
• Credit: Cash

General Ledger Department: Cash Disbursements

• It receives the journal voucher from cash disbursements, plus a summary of the accounts payable subsidiary ledger from Accounts Payable
• Utilizes the journal voucher to update the general ledger and reconciles the accounts payable control account with the subsidiary summary

Expenditure Cycle Phases

• The time lag divides the expenditure transaction cycle into two phases
• Physical phase (purchasing cycle)
• Financial phase (cash disbursements)

Expenditure Cycle Database

• Master files include supplier (vendor) master file, accounts payable master file, and merchandise inventory master file
• Transaction and Open Document Files include purchase order file, supplier's invoice file, open vouchers file, and cash disbursements file
• Other Files: Supplier reference and history file, buyer file, and accounts payable detail file

Purchase Requisition

• A need for an item triggers the expenditure cycle
• This can be based on reorder point or reorder quantity
• Manual process involves someone recognizing the need for a good or service and requesting via a purchase requisition form
• Computerized involves someone recognizing a need and requesting the good or service through a terminal and purchase requisition screen

Computer-Based Expenditure Applications: Purchases

• Includes purchase department duties which are incorporated into data processing for routine tasks
• A computer program identifies inventory needs and then authorizes and orders inventories using different methods
• One method is the system prepares purchase orders, sending them to the purchasing department for review, signing, and distribution
• the system distributes the POs directly to the vendors and internal users, bypassing the purchasing department
• The system uses EDI to electronically place orders

Computer Tasks

• The computer completes other tasks in the purchase system
• It updates the inventory subsidiary file from the receiving report
• It calculates batch totals for general ledger updates and closes related records in the open PO file
• A program also validates voucher records against a valid vendor file, adds them to the voucher register, and prepares batch totals to post to the general ledger

Computer-Based Expenditure Applications: Cash Disbursements

• The computer scans for vouchers currently due
• It prints checks for those vouchers
• It records these checks in the check register
• Batch totals are prepared for the general ledger update procedure

Levels of Automating and Re-Engineering Ordering

• Automating purchase requisitions involves the computer generating a purchase requisition, with the purchase department manually generating the purchase order
• Next, the computer generates a purchase order but not is not automatically sent; needing a manual review
• The Computer-generated P.O. is automatically sent
• EDI--no P.O.

EDI: Customer (Purchases Cycle)

• Internal Data Flows: Purchase Order, Receiving Report, Check or EFT
• External Data Flows: Vendor's Invoice, Goods, check or EFT

EDI: Seller (Revenue Cycle)

• Internal Data Flows: Customer Order, Sales Order, Shipping Documents
• External Data Flows: Check or EFT

Advantages of Real-Time Data Input & Processing Over Batch Processing

• Real-time input shortens the time-lag in record-keeping, delivering current records
• Batch processing eliminates much of the routine manual procedures, such as transcribing information onto paper documents
• It eliminates much of the storage and shuffling of paper documents and reduces data entry correction procedures

General Internal Controls

• Organization controls, segregation of duties
• Documentation and asset accountability controls
• Management practices and data center operations controls
• Authorization controls and access controls

Manual Authorization Controls

• Inventory Control department, not purchasing agents, should authorize purchases of inventory
• Accounts Payable authorizes payments of bills, not the cash disbursements clerk who writes the checks

Computer-Based Authorization Controls

• Authorizations are automated
• Programmed decision rules must be debugged
• Automating inventory using EDI and JIT, means a faulty inventory model can cause over- or under-purchasing
• Cash disbursements may automate check printing and signing
• Programming logic has to be flawless and automated signing only occurs below a dollar threshold

Segregation of Duties

• Includes warehouse (stores), inventory control, accounts payable, and general ledger
• Requisitioning, purchases, purchase returns and allowances, and cash disbursements

Manual Segregation of Functions

• Warehouse custody of inventory must be separate from recordkeeping by the Inventory Control department
• Cash Disbursements’ custody of cash has to be separate from Accounts Payable’s recordkeeping

Computer-Based Segregation of Functions

• Extensive consolidation by a computer
• Computer programs authorize and process purchase orders
• Computer programs authorize and issue checks to vendors

Manual Supervision

• Supervision inside the expenditure cycle is most important in the Receiving department
• Inventory arrives and is logged in by a receiving clerk
• Failures to properly inspect assets and theft are issues that occur

Computer-Based Supervision

• Automation often means collapsing of the traditional segregation of duties; requires more supervision
• Supervision changes as technology advances
• Requires electronic monitoring and supervision becomes more difficult as the workplace gets sophisticated
• Employees may have advanced IT training

Manual Accounting Records

• Adequate records must be kept for accounts payable, vouchers payable, and checks
• General ledger and the subsidiary ledgers must have records

Computer-Based Accounting Records

• Maintaining an audit trail becomes more difficult
• Accounting records rests on reliability and security of magnetically stored data
• The system needs to ensure that backup of all files is continuously kept
• Traditional automated systems still have a lot of paper documents
• IS becoming increasingly paperless has conflict with SAS 78 objectives

Manual Access Controls

• Controls are access to inventories (direct), cash (direct), and accounting records (indirect)

Computer-Based Access Controls

• Magnetic records are vulnerable and should be protected
• Limited file accessibility and monitored programs are needed

Manual Independent Verification

• The AP department checks the work done inside the expenditure cycle
• A purchase requests, orders, receiving report, and suppliers have invoices that are checked and verified
• General Ledger department verifies that the total obligations recorded, equaling the inventory and the payment reductions

Computer-Based Independent Verification

• Automating the process reduces the need for verification, reducing the chances of fraud.
• Shifts the verification need to the programmers and software.