Chapter 5 The Expenditure Cycle Part 1:
Purchases and Cash Disbursements Procedures
The Conceptual System
 intended to be technology-neutral
 the sequence of activities through two of the
processes that constitute the expenditure cycle for
most retail, wholesale, and manufacturing
organizations

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.
I. MONITOR INVENTORY RECORDS.
 Purchase requisition. When inventories drop to
a predetermined reorder point, the purchase cycle
begins. The clerk prepares a purchase requisition
and sends copies to Purchasing and Account
Payable.
II. PREPARE PURCHASE ORDER.
 Purchase Order. The Purchasing department
prepares a purchase order for each vendor and
sends copies to Inventory Control, Accounts
Payable, Receiving (blind copy), and the vendor.
 Valid Vendor Files. Supplied by the inventory
control function along with much of the routine
ordering information that the purchasing
department needs directly from the inventory
make the purchasing process efficient
III. RECEIVE GOODS
 Upon receipt of the goods, the Receiving
Department counts and inspects the goods.
o One of the purposes of the blind copy of the
purchase order is to force the workers to
count the goods.
 Receiving Report. Prepared by the receiving
clerk pagtapos ng physical count and inspection.
Naglalaman ng quantity and condition
inventories Sends copies to the raw materials
storeroom, Purchasing, Inventory Control, and
Accounts Payable.
 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.
*UPDATE INVENTORY RECORDS
 STANDARD COST SYSTEM. Carry their
inventories at a predetermined standard value
regardless of the price actually paid to the vendor
 ACTUAL COST INVENTORY LEDGER.
Requires additional financial information, such as
a copy of the supplier’s invoice when it arrives.
 Journal Voucher. Prepared by Accounts
Payable and sent to the General Ledger
department. Accounts Payable also prepares a
cash disbursements voucher and posts it in the
voucher register.
 The General Ledger Department:
o posts from the accounts payable journal
voucher to the general ledger
o reconciles the inventory amount with the
account summary received from inventory
control
to
Manual Cash Disbursement System
 Periodically, usually daily, Accounts Payable
searches the open vouchers payable file for
items with payments due:
o AP sends the voucher and supporting
documents to Cash Disbursements
o AP updates the accounts payable
subsidiary ledger
 The Cash Disbursements department:
ng
1. prepares the check
 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.

EXPENDITURE CYCLE CONTROLS
1. Transaction Authorization
 PURCHASES SUBSYSTEM
o Unauthorized purchasing can result in
excessive inventory levels for some
items
 CASH DISBURSEMENTS SUBSYSTEM
o A cash disbursements journal (check
register) containing the voucher number
authorizing each check provides an
audit trail for verifying the authenticity of
each check written.
2. Segregation of Duties
 Segregation of Inventory Control from the
Warehouse
o Within the purchases subsystem, the
primary physical asset is inventory
o Inventory control keeps the detailed
records of the asset, while the
warehouse has custody
 Segregation of the General Ledger and
Acc. payable from Cash Disbursements.
o The asset subject to exposure in the
cash disbursements subsystem is cash
3. Supervision
 In the expenditure cycle, the receiving
department is the area that most benefits
from supervision
 Close supervision here reduces the chances
of two types of exposure:
(1) failure to properly inspect the assets
and
(2) the theft of assets
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
accounting records:
o AP subsidiary ledger
o voucher register
o check register
o general ledger
5. Access Controls
 DIRECT ACCESS. Direct access controls include
locks, alarms, and restricted access to areas that
contain inventories and cash.
 INDIRECT ACCESS. A firm must limit access to
documents that control its physical assets.
6. Independent Verification
 Independent Verification by Accounts Payable
o Purchase requisitions, purchase orders,
receiving reports, and suppliers’ invoices
must be checked and verified by Accounts
Payable.
 Independent Verification by the General Ledger
Department
o the total obligations recorded equal the total
inventories received
o the total reductions in accounts payable
equal the total disbursements of cash
REENGINEERING THE PURCHASES/CASH
DISBURSEMENTS SYSTEM
CONTROL IMPLICATIONS. The Automated System
1. IMPROVED INVENTORY CONTROL
 provide management with adequate summary
reports about inventory purchases, inventory
turnover, spoilage, and slow-moving items
2. BETTER CASH MANAGEMENT
 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