Chapter 5 The Expenditure Cycle Part 1: storeroom, Purchasing, Inventory Control, and

Purchases and Cash Disbursements Procedures Accounts Payable.

The Conceptual System

 The Accounts Payable department has now
 intended to be technology-neutral
received copies of the purchase requisition,
 the sequence of activities through two of the
purchase order, and receiving report.
processes that constitute the expenditure cycle for
 Upon receipt of the supplier’s invoice, Accounts
most retail, wholesale, and manufacturing
Payable reconciles all documents, posts to the
organizations
purchases journal, and records the liability in the

accounts payable subsidiary ledger.
Manual Purchases System
 Periodically, the entries in the purchases journal
 The purchases cycle begins in the Inventory
are summarized in a journal voucher which is
Control department when inventory levels drop to
sent to the General Ledger department.
reorder levels. A clerk prepares a purchase
requisition and sends copies to Purchasing and *UPDATE INVENTORY RECORDS
Accounts Payable.  STANDARD COST SYSTEM. Carry their
inventories at a predetermined standard value
I. MONITOR INVENTORY RECORDS. regardless of the price actually paid to the vendor
 Purchase requisition. When inventories drop to  ACTUAL COST INVENTORY LEDGER.
a predetermined reorder point, the purchase cycle Requires additional financial information, such as
begins. The clerk prepares a purchase requisition a copy of the supplier’s invoice when it arrives.
and sends copies to Purchasing and Account
Payable.  Journal Voucher. Prepared by Accounts
II. PREPARE PURCHASE ORDER. Payable and sent to the General Ledger
 Purchase Order. The Purchasing department department. Accounts Payable also prepares a
prepares a purchase order for each vendor and cash disbursements voucher and posts it in the
sends copies to Inventory Control, Accounts voucher register.
Payable, Receiving (blind copy), and the vendor.  The General Ledger Department:
o posts from the accounts payable journal
 Valid Vendor Files. Supplied by the inventory
voucher to the general ledger
control function along with much of the routine o reconciles the inventory amount with the
ordering information that the purchasing account summary received from inventory
control
department needs directly from the inventory to
make the purchasing process efficient
Manual Cash Disbursement System
III. RECEIVE GOODS  Periodically, usually daily, Accounts Payable
 Upon receipt of the goods, the Receiving searches the open vouchers payable file for
Department counts and inspects the goods. items with payments due:
o One of the purposes of the blind copy of the o AP sends the voucher and supporting
purchase order is to force the workers to documents to Cash Disbursements
count the goods. o AP updates the accounts payable
 Receiving Report. Prepared by the receiving subsidiary ledger
clerk pagtapos ng physical count and inspection.
 The Cash Disbursements department:
Naglalaman ng quantity and condition ng
1. prepares the check
inventories Sends copies to the raw materials
 2. records the information in a check register COMPUTER-BASED Expenditure Applications—
(cash disbursements journal) Purchases
3. returns paid vouchers to accounts payable,
 Incorporates a data processing department which
mails the check to the supplier
4. sends a journal voucher to General Ledger performs many of the routine accounting tasks
 Purchasing - a computer program
 The General Ledger department receives: identifies inventory requirements and can
1. the journal voucher from cash disbursements use one of the following methods for
2. a summary of the accounts payable authorizing and ordering inventories
subsidiary ledger from Accounts Payable o the system prepares the POs and sends
 The journal voucher is used to update the them to the Purchasing department for
review, signing, and distributing
general ledger.
o the system distributes the POs directly
 The accounts payable control account is to the vendors and internal users,
reconciled with the subsidiary summary. bypassing the Purchasing department
o the system uses EDI and electronically
places the order
The Expenditure Cycle
 The time lag splits the expenditure transaction
 Other tasks performed by the computer:
cycle into two phases:
o Updates the inventory subsidiary file
o physical phase (purchasing cycle) from the receiving report and calculates
o financial phase (cash disbursements) batch totals for the general ledger
update procedure and then closes the
corresponding records in the open PO
file to the closed PO file
o A program validates the voucher
records against the valid vendor file,
adds them to the voucher register, and
prepares batch totals for posting to the
general ledger
o the system scans for vouchers currently
due
o prints checks for these vouchers
o records these checks in the check
register
o batch totals are prepared for the
general ledger update procedure

Levels of Automating and Re-Engineering Ordering

The Purchase Requisition. A need for an item starts the
 Computer generates purchase requisition
expenditure cycle  Purchase department manually generates
 Manual: to initiate a credit purchase, someone in purchase order
 Computer generates purchase order (no P.R.
the organization recognizes a need for a good or
needed)
service; an authorized person requests the good  Not sent until manually reviewed
or service using a purchase requisition form.  Computer-generated P.O. is automatically sent
 Computerized: to initiate a credit purchase,
someone in the organization recognizes a need
for a good or service; an authorized person
requests the good or service using a terminal and
a purchase requisition screen.
 INSPECTION OF ASSETS
packing slip - containing quantity information that could be
used to circumvent the inspection
*A supervisor should take custody of the packing slip while
receiving clerks count and inspect the goods

4. Accounting Records
 To maintain an audit trail adequate for tracing a
transaction from its source document to the
financial statements.
 The expenditure cycle employs the following
EXPENDITURE CYCLE CONTROLS accounting records:
1. Transaction Authorization o AP subsidiary ledger
o voucher register
 PURCHASES SUBSYSTEM
o check register
o Unauthorized purchasing can result in o general ledger
excessive inventory levels for some 5. Access Controls
items  DIRECT ACCESS. Direct access controls include
 CASH DISBURSEMENTS SUBSYSTEM
locks, alarms, and restricted access to areas that
o A cash disbursements journal (check
contain inventories and cash.
register) containing the voucher number
authorizing each check provides an  INDIRECT ACCESS. A firm must limit access to
audit trail for verifying the authenticity of documents that control its physical assets.
each check written.
6. Independent Verification
2. Segregation of Duties
 Independent Verification by Accounts Payable
 Segregation of Inventory Control from the
o Purchase requisitions, purchase orders,
Warehouse
receiving reports, and suppliers’ invoices
o Within the purchases subsystem, the must be checked and verified by Accounts
primary physical asset is inventory Payable.
o Inventory control keeps the detailed  Independent Verification by the General Ledger
records of the asset, while the
Department
warehouse has custody
 Segregation of the General Ledger and o the total obligations recorded equal the total
inventories received
Acc. payable from Cash Disbursements.
o the total reductions in accounts payable
o The asset subject to exposure in the equal the total disbursements of cash
cash disbursements subsystem is cash
REENGINEERING THE PURCHASES/CASH
3. Supervision
DISBURSEMENTS SYSTEM
 In the expenditure cycle, the receiving
department is the area that most benefits CONTROL IMPLICATIONS. The Automated System
from supervision
 Close supervision here reduces the chances 1. IMPROVED INVENTORY CONTROL

of two types of exposure:  provide management with adequate summary

reports about inventory purchases, inventory
(1) failure to properly inspect the assets turnover, spoilage, and slow-moving items
and 2. BETTER CASH MANAGEMENT
(2) the theft of assets  set a materiality threshold for check writing
3. TIME LAG
  When sales clerks do not know the current
status of inventory, sales may be lost.

4. PURCHASING BOTTLENECK
 In this automated system, the purchasing
department is directly involved in all
purchase decisions. For many firms this
creates additional work, which extends the
time lag in the ordering process.
5. EXCESSIVE PAPER DOCUMENTS.
 The Reengineered System - improvements in this
Reengineered System are that
a. it uses real-time procedures and direct
access files to shorten the lag time in record
keeping
b. it eliminates routine clerical procedures by
distributing terminals to user areas
c. it achieves a significant reduction in paper
documents by using digital communications
between departments and by digitally storing
records.

*control implications of The Reengineered System

 SEGREGATION OF DUTIES
 system removes the physical separation
between authorization and transaction
processing
 ACCOUNTING RECORDS AND ACCESS
CONTROLS
 Advanced systems maintain accounting
records on digital storage media, with
little or no hard-copy backup