Purchase & Payment Business Process

Purchases and Payments Business Process

• Financial statement accounts link into cycles
• A cycle is a set of logically grouped accounts in the internal control system.
• Four major cycles include Revenue and Collection, Acquisition and Expenditure, Production, and Finance and Investment.
• Encompasses inventory purchase, supplier records, trade account payments with discounts, accounting transactions for purchases, accounts payable, cash disbursements, and inventory effects.

Accounting Transactions: Example

• Purchasing inventory on credit from Richardson & Sons, Inc. against Invoice No. 1159, issued on Oct 1 with terms 2/10, net 30: debit Purchases (or Inventory) $1,495.50, credit Accounts Payable $1,495.50 on Oct 1.
• Paying Richardson & Sons, Inc. for Invoice 1159 from Oct 1 with a 2% discount: debit Accounts Payable $1,495.50, credit Purchase Discounts $29.91, and Cash $1,465.59 on Oct 11.

Activities in the Purchase-to-Pay Cycle

• Involves requesting a purchase, receiving goods and services, receiving invoices that generate accounts payable, and making payment.

Considerations for Accounting Activities

• When an order is placed to purchase the inventory on credit debits the inventory for $1,000 and credits A/P for $1,000
• For a sales return with full credit debit A/P $1,000 for the A/P and credits inventory $1,000.
• For full inventory payment debit A/P $1,000 and credit cash $1,000
• In the case of paying early and net 10 with purchase discounts debit A/P $1,000 credits purchase discounts $100 and credits cash $900.

Period-End Accounts Payable Formula

• Beginning AP + purchases - returns - cash payments = Ending AP.

Sunset Graphics: Purchases & Payments

• Sunset Graphics purchases process: research prices/availability, send purchase order, receive items with associated A/P recording, supplier payment per credit terms.

BPMN Activity Model for Sunset Graphics

• The BPMN activity model documents Sunset Graphic's purchases and payments process
• Context includes suppliers and message flows between Sunset Graphics and suppliers.
• A basic sales activity model (BPMN) is derived from process flows, starting when Sunset needs to purchase items for customer order fulfillment, continuing until Sunset receives and pays, marking the process end.
• Sunset records purchases and updates inventory upon receipt and records cash disbursements when payment is sent.
• Access controls limit who can view or change records supporting segregation of duties.
• Application controls ensure data integrity and create an audit trail.
• The UML class model for Sunset Graphics utilizes purchase orders as commitments to purchase from the supplier
• Purchases document the receipt of items from the supplier

Process Controls

• Process controls prevent, detect, and rectify issues.
• Preventive control involves proper transaction authorization and duty segregation.
• Detective control is designed to find problems.
• Corrective control mitigates problems and damage.

Access & Application Controls

• Process steps, intention, partner authority/action, access controls, and application controls for implementing access and application

Purchases UML Class Model

• Sunset's basic purchases UML class model defines how to select a supplier and issue a purchase order

Types of Process Controls

• Limit the number of people with access to records in a system to ensure proper segregation of duties.

Basic Purchases UML Class Model

• Purchase Orders are commitments from the supplier
• Purchases documents the receipt of the supplier
• Cash disbursement pays for more than one receipt
• Purchase Orders document
• Purchases are collapsed into Purchase Orders
• Product Categories categorize Products
• Supplier Categories categorize Suppliers

Generic Purchases / Payments Model

• Each Supplier must perform at least one purchase
• Each Purchase involves a minimum of one and a maximum of many Inventory items. Each Inventory item can be purchased zero times or many times. The multiplicities on this association are typical when Inventory is carried at a type of product level, such as when the inventory is identified by UPC code.
• Each Cash Disbursement (for example, one check) is paid from one and only one Cash account, and each Cash account is associated with a minimum of zero cash disbursements and a maximum of many cash disbursements

Quiz

• Each employee participates in a minimum of zero purchases.
• Each purchase is received by one employee.
• Each vendor receives a minimum of zero cash disbursements.
• A cash disbursement can be made to a maximum of one vendor.
• Vendors may receive many purchase orders.
• Each purchase order is issued to a minimum of one vendor.
• Each purchase order is associated with a maximum of many inventory items.
• Each inventory item is ordered on a minimum of zero purchase orders.
• Each inventory item is associated with a minimum of zero purchases

BBB's Expenditure Process Case Study

• Baer Belly Bikinis Inc. (BBB) is located in Santa Monica, CA.
• Sells swimwear and related product to specialty stores
• BBB products are carried in more than 1,000 swimwear boutiques and online retailers,
• BBB purchases miscellaneous services and supplies such as electricity, water, sewage, garbage, phone, and janitorial.
• BBB also pays monthly rent on, purchases office supplies, and hires photo shoot models and photographers.
• BBB pays it's misc. suppliers at the end of the month all the month's purchases.

BBB Cash Disbursments

• BBB assigns sequential check numbers
• All checks for purchases are written using the main bank account.

Answers to Multiple Choice Questions

• The class designated with the letter A is Fabric Purchases.
• The class designated with the letter B is Miscellaneous Purchases.
• The class designated with the letter C is Employees.
• The class designated with the letter D is Cash.
• The correct multiplicities designated with the number 1 is 1..*.
• The correct multiplicities designated with the number 2 is 0..*.
• The correct multiplicities designated with the number 3 is 0..1.
• The correct multiplicities designated with the number 4 is 0..*.
• The correct multiplicities designated with the number 5 is 0..*.
• The correct multiplicities designated with the number 6 is 0..*.
• The correct multiplicities designated with the number 7 is 1..1.
• The correct multiplicities designated with then number 8 is 0..1.

BBB Tables

• The cash table shows # of bank accounts w description and balance.
• Check # Shows in accounts payable.

Query Examples for BBB

• Database queries provide for BBB to show various summaries relating to the business
• Purchase of fabric to be used between certain dates, total yards purchased between two dates, -Purchases of miscellaneous Items that have been issued
• Fabric Vendors used by company, and what has been purchased by company. Most used types of product/supplies by company.

###Integrating Sales and Purchases Models

• Resources such as Products and Internal Cash and Agents such as Employees, can be shared throughout processes
• Events within process such as suppliers and Customers require proper specifications for effective use.