Chapter 5: THE EXPENDITURE CYCLE

PART I: PURCHASES AND CASH DISBURSEMENTS I. Purchase System

PROCEDURES • Begins in Inventory Control when inventory levels drop to
reorder levels. (only buy what we need)
• A Purchase Requisition (PR) is prepared and copies to
sent to Purchasing.
➢ Also known as Purchase Request Form
➢ Document that is created by a purchaser and
submitted to department that controls finances.
➢ Getting approval to buy.
• Purchasing Department prepares a Purchase Order (PO)
for each vendor and sends copied to Inventory Control,
Accounts Payable (A/P, and Receiving
➢ PO, commercial document and the first official
offer issued by a buyer to a seller, Ibibigay kay
seller indicating details about the products.
• Upon receipt, Receiving Department counts and inspects
the goods.
➢ A blind copy of the PO is used to force workers to
count the goods. (Blind PO, also the PO but some
parts of it will be shaded or removed, usually ang
Overall Goals of the Expenditure Cycle natitira lang ay description at sino yung pinag
• The goal of providing needed resources to organization can orderan)
be broken down into several objectives: • After counting, a receiving report is prepared and copies
o Purchase from reliable vendors (avoid problems) sent to the Raw Materials Storeroom, Purchasing, Inventory
o Purchase high quality items Control, and A/P.
o Obtain best possible price • A/P receives copies of the PR, PO, Receiving Report, and
o Purchase only items that are properly authorized Supplier’s Invoice.
(to avoid unauthorized purchase that can lead to • A/P reconciles these documents, posts to the purchases
fraud) journal, and records the liability in the A/P subsidiary ledger.
o Have resources available when they are needed • A/P periodically summarizes the entries in the purchases
o Receive only those items ordered journal as a journal voucher which is sent to the General
o Ensure items are not lost, stolen, or broken Ledger (G/L) Department.
o Pay for the items in a timely manner Inventory – Control or Purchases XX
Accounts Payable – Control XX
• A/P also prepares a cash disbursements voucher and posts
it in the voucher register.
➢ Not the responsible dept. for payment.
• G/L Department
➢ Posts from the A/P journal voucher to the G/L.
➢ Reconciles the inventory amount with the account
summary received from inventory control.
II. Cash Disbursements System Computer-Based Accounting Systems (CBAS)

• Periodically, A/P searches the open vouchers payable file • CBAS technology can be viewed as a continuum with
for items with payments due: two extremes:
➢ A/P sends the voucher and supporting documents ➢ Automation – use technology to improve
to Cash Disbursements efficiency and effectiveness. (Manual to
➢ A/P updates the A/P subsidiary ledger Automate)
• Cash Disbursements ➢ Reengineering – use technology to restructure
➢ Prepares the check business processes and firm organization.
➢ Records the info in a check register (Cash (Streamline the processes in the reengineering
Disbursements Journal) portions)
➢ Returns paid voucher to A/P, mails the check to
Levels of Automating and Reengineering Ordering
the supplier
➢ Sends a journal voucher to G/L • Computer Generates PR
Accounts Payable XX ➢ Purchases manually generates PO
Cash XX • Computer Generates PO (no PR needed)
• G/L Dept. (Also known as General Accounting ➢ PO not sent until manually reviewed
Department) receives the journal voucher from cash • Computer-generated PO is automatically sent without
disbursement manual review
➢ Record and prepares a summary of the A/P • Electronic Data Interchange (EDI)
subsidiary ledger from A/P ➢ Computer-to-computer communication without
• The journal voucher is used to update the G/L PO (one company to another)
• The A/P control account is reconciled with the subsidiary
summary Expenditure Cycle Database

• Master Files
➢ Supplier (vendor) master file
➢ Accounts Payable master file
➢ Merchandise Inventory master file
• Transaction and Open Document Files
 ➢ Purchase order file
▪ Open purchase order file – not yet
deliver, not yet done
➢ Supplier’s Invoice file
➢ Open vouchers file
➢ Cash Disbursements file
• Other Files
➢ Supplier reference and history file
➢ Buyer file
➢ Accounts Payable detail file
Computer-Based Purchases

• A Data Processing dept. performs routine accounting

task. (check inventory control)
• Purchasing – a computer program identifies inventory
requirements
• The following methods are used for authorizing and
ordering inventories:
➢ The system prepares Pos and sends them to
Purchases for review, signing, and distributing
➢ The system distributes Pos directly to the vendors
and internal users, bypassing Purchases
➢ The system uses electronic data interchange
(EDI) and electronically places the order without
POs
• Other tasks performed automatically by the computer:
➢ Updates the inventory subsidiary file from the
Advantages of Real-time Data Input & Processing Over Batch
receiving report
Processing
➢ Calculates batch totals for G/L update
➢ Closes the corresponding records in the open PO • Shortens the time-lag in record-keeping; hence, records are
file to the closed PO file more current
➢ Validates the voucher records against valid • Eliminates much of the routine manual procedures, such as
vendor files transcribing info onto paper documents
• Tasks performed automatically by the computer: • Eliminates much of the storage and shuffling of paper
➢ The system scans for vouchers currently due documents
➢ Prints checks for these vouchers • Reduces data entry correction procedures
➢ Records these checks in the check register
➢ Batch totals are prepared for the G/L update
procedure
 • Warehouse (stores)
• Inventory Control
SUMMARY OF INTERNAL CONTROLS
• A/P
Control Activity Purchases Processing Cash Disbursements • G/L
System System • Requisitioning
Transactions Inventory Control Accounts payable • Purchases
Authorization authorizes payment • Purchases returns and allowances
Segregation of Inventory control separate Separate A/P subsidiary • Cash disbursements
Duties from purchasing and ledger, cash
Segregation of Functions
inventory custody. A/P disbursements, and G/L
subsidiary ledger separate functions • Custody of the asset, inventory, by the Warehouse must be
from the G/L separate from recordkeeping for the assets by the Inventory
Supervision Receiving Department Control
Accounting A/P subsidiary ledger, G/L, Voucher payable file, A/P • Custody of the asset, cash, by Cash Disbursements must be
Records purchases requisition file, subsidiary ledger, cash kept separate from recordkeeping for the asset by A/P
purchase order file, disbursements journal,
receiving report file G/L cash accounts Computer-based Segregation of Functions

Access Security of physical

Proper security over • Extensive consolidation by the computer of tasks
assets. Limits access to
cash. Limit access to the traditionally segregated
the accounting records
accounting records ➢ Computer programs authorize and process PO
above above ➢ Computer programs authorize and issue checks to
Independent A/P reconciles source
Final review by cash vendors
Verification documents before liability
disbursements. Overall Supervision
is recorded. G/L reconciles
reconciliation by G/L.
overall accuracy of
Periodic bank • Within the expenditure cycle, supervision is of highest
process reconciliation by importance in the Receiving Department, where the
controller inventory arrives and is logged in by a receiving clerk.
CONTROL POINTS IN THE EXPENDITURE CYCLE Need to minimize:
➢ Failures to properly inspect the assets
➢ Theft of the assets
General Internal Controls Computer-based Supervision
• Organization Controls • Automation often leads to a collapsing of the traditional
➢ Segregation of duties segregation of duties.
• Documentation ➢ Requires greater supervision
• Asset Accountability Controls • Supervision takes on new aspects as technology advances
• Management Practices ➢ Electronic monitoring
• Data Center Operations Controls • Supervision because more difficult as the workplace
• Authorization Controls becomes more sophisticated
• Access Controls ➢ Employees may have advanced IT training
Authorization Controls Accounting Records
• Purchases of inventory should be authorized by the • Must maintain adequate records for:
Inventory Control Department, not by purchasing agents ➢ A/P
• A/P authorizes the payments of bills, not the cash ➢ Vouchers Payable
disbursements clerk, who writes the checks ➢ Checks
➢ G/L
Computer-based Authorization Controls ➢ Subsidiary Ledgers
• Authorizations are automated Computer-based Accounting Records
➢ Programmed decision rules must be debugged
• Automating Inventory in EDI and JIT • Accounting records rest on the reliability and security of
➢ Faulty inventory model can lead to over- stored digitalized data
purchasing or under-purchasing ➢ Accountants should be skeptical about the
• Cash disbursements may automate check printing and accuracy of hard-copy printouts
signing ➢ Backups – the system needs to ensure that
➢ Programming logic must be flawless backups of all files are continuously kept
➢ Automated signing only below a dollar threshold • Most automated systems still have a lot of paper documents
➢ This is good for audit trail purposes but is often
Traditional Segregation of Duties inefficient
 ➢ As the systems becomes increasing paperless,
maintaining an audit trail becomes more difficult
Access Controls

• Access to:
➢ Inventories (direct)
➢ Cash (Direct)
➢ Accounting Record (Indirect)
Computer-based Access Controls

• Magnetic records are vulnerable to both authorized and

unauthorized exposure and should be protected
➢ Must have limited file accessibility
➢ Programs must be safeguarded and monitored
Independent Verification

• A/P Department verifies much of the work done within the

expenditure cycle
➢ PR, PO, receiving reports, and suppliers’ invoices
must be checked and verified by A/P
• G/L Department verifies:
➢ The total obligations recorded equal the total
inventories received
➢ The total reductions in accounts payable equal the
total disbursements of cash
Computer-based Independent Verification

• Automating the accounting function reduces the need for

verification by reducing the chances of fraud and error in the
expenditure cycle
• However, the need for verification shifts to the computer
program and the programmers where fraud and error may
still be present