Expenditure Cycle:

Purchases and
Cash Disbursement
Procedures
@James Hall Chapter 5
Prepared by CPA JAMES
Executive Summary
• The objective of the
expenditure cycle is to
convert the organization’s
cash into the physical
materials and the human
resources it needs to
conduct business.
• In this chapter we
concentrate on systems
and procedures for
acquiring raw materials
and finished goods from
suppliers.
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Learning Objectives
• Recognizing tasks that constitute the
purchases and cash disbursements
process.
• Identifying functional areas involved in
purchases and cash disbursements
activities and trace their flow.
• Specifying documents, journals, and
accounts that provide audit trails and
management decisions.
• Understanding different risk and controls
in this cycle.
• Highlighting the significance of technology
in improving efficiency of the cycle.

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Activities within Purchases and
Cash disbursement cycle.
• In this section, it is important to describe activities
involved in the cycle, by grouping the activities into
two categories
• Purchases Processing Procedures
• Cash Disbursement Procedures

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Purchases Processing Procedures
Identifying
Inventory
Needs

Posting to
Placing the
general
Order
ledgers

Recognizing Receiving
Liability Inventory

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1. Identifying Inventory Needs
• The activity is carried out by Inventory
management unit
• After inventory fall below reorder point.
• The function is evidenced by a document –
Purchase Requisition Form
• Contains items requested, suggested vendor name(s),
price list from previous purchases, expected delivering
dates.
• The document is sent to Purchase Dept.

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Re-call re-order point

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2. Placing the Order

• Purchasing department places an

order through a document
known as Purchase Order (PO)
• The Department prepares 4
copies of POs
• One to Vendor
• Second to Accounts Payable Dept.
• Third, as a Blind Copy to Receiving
Dept.
• Final Copy, is filed in Open/Closed
PO file.

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3. Receiving Inventory
• The Receiving Dept. receive
inventory from the vendor
with the following
documents
• Bill of lading, packing slips
• With strong supervision,
receiving staff inspect the
goods and count the
quantity.
• Then, Receiving Report is
prepared (5 copies)
• Warehouse, PO file, AP
pending file, inventory
control (updating inventory),
Receiving report file.

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4. Recognizing Liability
• The Accounts payable section, wait for receiving of
Purchase Invoice to recognize liability.
• Before posting to the ledger they have to match
• Purchase Requisition
• Purchase Order
• Receiving Report
• The above process is called Three Way Check.
• Then make journal entry: Dr. Inventory/ Purchases A/c
Cr. Accounts payable

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5. Posting to the general ledger
• The general ledger department receives a journal
voucher from the AP department and an account
summary from inventory control.
• The general ledger clerk reconciles these and posts
to the inventory and AP control accounts.
• The final thing in the Purchases Cycle.

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Cash Disbursement System

Identifying
Liability
Due

Prepare
Post to
Cash
General
disbursem
Ledger
ent

Update AP
record

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1. Identifying Liability Due
• The cash disbursements process begins in the AP
department by identifying items that have come
due.
• Each day, the AP function reviews the open AP file
(or vouchers payable file) for such items and sends
payment approval in the form of a voucher packet
• (the voucher and/or supporting documents) to the cash
disbursements department.

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2. Prepare Cash Disbursement
• The cash disbursements clerk receives the voucher
packet and reviews the documents for
completeness and clerical accuracy.
• For each disbursement, the clerk prepares a check
(three copies) and records the
• check number, dollar amount, voucher number, and
other pertinent data in the check register, which is also
called the cash disbursements journal.

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2. Prepare Cash Disbursement…
• Based on materiality, check might be approved by
accountant and a finance manager ( or treasurer)
• One copy is sent to Vendor.
• Second Copy is attached with the Voucher packet, to
signify payment.
• The clerk marks the documents in the voucher packets paid
and returns them to the AP clerk.
• Finally, the cash disbursements clerk summarizes the entries
made to the check register and sends a journal voucher with
the following journal entry to the general ledger
department: DR Accounts Payable XXXX CR. Cash XXXX.

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3. Updates Accounts Payable
record
• Upon receipt of the voucher packet, the AP clerk
removes the liability by debiting the AP subsidiary
account or by recording the check number and
payment date in the voucher register.
• The voucher packet is filed in the closed voucher
file, and an account summary is prepared and sent
to the general ledger function

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4.Posting to general ledger
• The general ledger function receives the journal
voucher from cash disbursements and the account
summary from AP.
• The voucher shows the total reductions in the firm’s
obligations and cash account as a result of payments to
suppliers.
• These numbers are reconciled with the AP summary,
and the AP control and cash accounts in the general
ledger are updated accordingly.
• The approved journal voucher is then filed. This
concludes the cash disbursements procedures
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Voucher System
• A voucher system is a method for authorizing the
disbursement of cash.
• A voucher is filled out that identifies what is to be paid
for, the amount to be paid, and the account number to
be charged. ... Thus, a voucher system is a control used
to ensure that cash is only spent on authorized
purchases.
• A voucher system sets up procedures to safely
verify, approve, record, and issue cash
disbursements.

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Voucher The company Create the Order for the

Systems Supplier.

Steps to follow:-
The company receive the order from
vendor and Check the goods.

The Voucher for the transaction is

created, attached with all necessary
documents.

All the documents in the voucher are

checked, approved and then the
company will pay.

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 • Purchase
Documents in Requisition
the Expenditure • Purchase Order
Cycle • Receiving Report
• Vendor`s Invoice
Summary of the necessary
documents pertaining to the
• Disbursement
cycle. Voucher
• Check

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 • Voucher register
• Check register
• Open Purchase order
Reports and Files
in the Expenditure file
Cycle • Open AP file
• Payable Aging Report
• Vendor Performance
Report

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Departments INVENTORY CONTROL

in the Cycle PURCHASING

The following are the important
department in the expenditure
cycle. RECEIVING

ACCOUNTS PAYABLE

CASH DISBURSEMENT

GENERAL LEDGER

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Internal Controls
• The Expenditure Cycle needs controls to safeguard
company assets: (inventory and cash). It includes:-
• Transaction Authorization
• Segregation of Duties
• Supervision
• Accounting records and documents
• Limiting Access i.e. Access Controls
• Independent Verification

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Internal Controls…

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Significance of Technology
• To improve the inventory management system so
as to identify needs item on-real-time.
• To improve the receiving of goods and updating of
inventory control ledgers
• To set important controls (system controls) to
protects the inventory, cash, records as well as files.
• To easy the process of making payments to vendors
• Internet banking.
• Ensure there is a strong back ups of all vendors
informations

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