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
4
5
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.
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