TOPIC 4

The Expenditure Cycle

Part I: Purchases and Cash

Disbursements Procedures

Objectives To explain nature of expenditure cycle. To describe the objectives of the purchasing and cash

disbursement in expenditure cycle and the relevant organizational units.

To identify the fundamental tasks that constitutes the cycle. To identify the manual system that used in expenditure

cycle. To describe the data processing in the expenditure cycle To describe various reports that can be generated from the

expenditure cycle. To identify the files and the data structures that is needed

within the database.

P R O C U R E M E N T C Y C L E(S U B S Y S T E M )

P u rch as in g

A cco u n ts P ayab le

R ece iv in g /In sp ec tio nC ash D isb u rsem en ts

P u rch ase R eq u is itio n

1 2

3

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Goals of the Expenditure Cycle

The goal of providing needed resources to organization can be broken down into several objectives:

purchase from reliable vendors purchase high quality items obtain best possible price purchase only items that are properly authorized have resources available when they are needed receive only those items ordered ensure items are not lost, stolen,

or broken pay for the items in a timely manner

DFD of Purchases System

A Manual Purchases System

The purchases cycle begins in the Inventory Control department when inventory levels drop to reorder levels.

A clerk prepares a purchase requisition and sends copies to Purchasing and Accounts Payable.

The Purchasing department prepares a purchase order for each vendor and sends copies to Inventory Control, Accounts Payable, Receiving (blind copy), and the vendor.

A Manual Purchases System

Upon receipt of the goods, the Receiving department counts and inspects the goods. One of the purposes of the blind copy of the

purchase order is to force the workers to count the goods.

A worker then prepares the receiving report and sends copies to the raw materials storeroom, Purchasing, Inventory Control, and Accounts Payable.

A Manual Purchases System

The Accounts Payable department has now received copies of the purchase requisition, purchase order, and receiving report.

Upon receipt of the supplier’s invoice, Accounts Payable reconciles all documents, posts to the purchases journal, and records the liability in the accounts payable subsidiary ledger.

Periodically, the entries in the purchases journal are summarized in a journal voucher which is sent to the General Ledger department.

A Manual Purchases System

The journal voucher is prepared by Accounts Payable and sent to the General Ledger department:Inv-Control or Purchases DR Accts Payable-Control CR

Accounts Payable also prepares a cash disbursements voucher and posts it in the voucher register.

A Manual Purchases System

The General Ledger department: posts from the accounts payable

journal voucher to the general ledger

reconciles the inventory amount with the account summary received from inventory control

Manual Purchases System

DFD of Cash Disbursements System

Manual Cash Disbursements System

Periodically, usually daily, Accounts Payable searches the open vouchers payable file for items with payments due: AP sends the voucher and

supporting documents to Cash Disbursements

AP updates the accounts payable subsidiary ledger

Manual Cash Disbursements System

The Cash Disbursements department prepares the check records the information in a check

register (cash disbursements journal) returns paid vouchers to accounts

payable, mails the check to the supplier sends a journal voucher to General

Ledger:Accounts Payable DR Cash CR

Manual Cash Disbursements System

The General Ledger department receives: the journal voucher from cash

disbursements a summary of the accounts payable

subsidiary ledger from Accounts Payable The journal voucher is used to update the

general ledger. The accounts payable control account is

reconciled with the subsidiary summary.

Cash Disbursements System

The Expenditure Cycle The time lag splits the expenditure

transaction cycle into two phases: physical phase (purchasing cycle) financial phase (cash disbursements)

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 supplier’s invoice file open vouchers file cash disbursements file

Other Files supplier reference and

history file buyer file accounts payable detail

file

The Purchase Requisition A need for an item starts the expenditure

cycle based on reorder point or reorder quantity manual: 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 purchase requisition form

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

Computer-Based Expenditure Applications--Purchases

Incorporates a data processing department which performs many of the routine accounting tasks purchasing - a computer program identifies

inventory requirements and can use one of the following methods for authorizing and ordering inventories

the system prepares the POs and sends them to the purchasing department for review, signing, and distributing

the system distributes the POs directly to the vendors and internal users, bypassing the purchasing department

the system uses EDI and electronically places the order

Computer-Based Expenditure Applications--Purchases

Other tasks performed by the computer: updates the inventory subsidiary file from

the receiving report, calculates batch totals for the general ledger update procedure and then closes the corresponding records in the open PO file to the closed PO file

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

Computer-Based Expenditure Applications--Cash Disbursements

Tasks performed by the computer: the system scans for vouchers

currently due prints checks for these vouchers records these checks in the check

register batch totals are prepared for the

general ledger update procedure

Levels of Automating and Re-Engineering Ordering

Computer generates purchase requisition purchase department manually generates

purchase order Computer generates purchase order

(no P.R. needed) not sent until manually reviewed

Computer-generated P.O. is automatically sent

EDI--no P.O.

SalesOrder

ShippingDocuments

SELLER (REVENUE CYCLE)

SalesInvoice

Check

CUSTOMER (PURCHASES CYCLE)

Vendor’sInvoice

ReceivingReport

Check

Internal Data Flows Internal Data FlowsExternal Data Flows External Data Flows

EDI

PurchaseOrder

Customer Order

or EFT or EFT

Goods

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

Shortens the time-lag in record-keeping; hence, records are more current

Eliminates much of the routine manual procedures, such as transcribing information onto paper documents

Eliminates much of the storage and shuffling of paper documents

Reduces data entry correction procedures

Summary of Internal Controls

General Internal Controls

Authorization Controls Organization controls

segregation of duties supervision

Accounting Records Access Controls Independent Verification

Manual Authorization Controls

Purchases of inventory should be authorized by the Inventory Control department, not by purchasing agents

Accounts Payable authorizes the payments of bills, not the cash disbursements clerk, who writes the checks

How do these controls change in a CB environment?

Computer-Based Authorization Controls

Authorizations are automated. programmed decision rules must be debugged

Automating inventory in EDI and JIT faulty inventory model can lead to over-

purchasing or under-purchasing Cash disbursements may automate check

printing and signing. programming logic must be flawless automated signing only below a dollar

threshold

Segregation of Duties Warehouse (stores) Inventory control Accounts payable General ledger Requisitioning Purchases Purchases returns and allowances Cash disbursements

Manual Segregation of Functions

Custody of the asset, inventory, by the Warehouse must be separate from recordkeeping for the assets by the Inventory Control department

Custody of the asset, cash, by Cash Disbursements must be kept separate from recordkeeping for the asset by the Accounts Payable department

How do these controls change in a CB environment?

Computer-Based Segregation of Functions

Extensive consolidation by the computer of tasks traditionally segregated computer programs authorize

and process purchase orders computer programs authorize

and issue checks to vendors

Manual Supervision

Within the expenditure cycle, supervision is of highest importance in the Receiving department, where the inventory arrives and is logged in by a receiving clerk. Need to minimize: failures to properly inspect the assets theft of the assets

How do these controls change in a CB environment?

Computer-Based Supervision Automation often leads to a collapsing

of the traditional segregation of duties. requires greater supervision

Supervision takes on new aspects as technology advances. electronic monitoring

Supervision because more difficult as the workplace becomes more sophisticated. employees may have advanced IT training

ManualAccounting Records

Must maintain adequate records for: accounts payable vouchers payable checks general ledger subsidiary ledgers

How do these controls change in a CB environment?

Computer-BasedAccounting Records

Maintaining an audit trail becomes more difficult. Accounting records rests on reliability and security of

magnetically stored data. Be skeptical about accepting, on face value, the

accuracy of computer produced hard-copy printouts of journals and ledgers.

The system needs to ensure that backup of all files is continuously kept.

Traditional automated systems still have a lot of paper documents. This is good for audit trail purposes but is often inefficient. As IS becomes increasing paperless, notice the conflict

with SAS 78 objectives.

Manual Access Controls

Access to: inventories (direct) cash (direct) accounting records

(indirect)

How do these controls change in a CB environment?

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

ManualIndependent Verification

The Accounts Payable department verifies much of the work done within the expenditure cycle. Purchase requisitions, purchase orders,

receiving reports, and suppliers’ invoices must be checked and verified by Accounts Payable.

The General Ledger department verifies: the total obligations recorded equal the total

inventories received the total reductions in accounts payable equal

the total disbursements of cashHow do these controls change in a CB environment?

Computer-BasedIndependent 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.