Chapter 5

The Expenditure Cycle Part I: Purchases and

Cash Disbursements Procedures
BSA 2-1

Alinsod, Eliseo U.

Mariñas, James Paul C.

Cabungcal, Kimberly Elaine C.

Fernandez, Trisha Allyson D.

Martinez, Mark Ian G.

Esmeria, Nhicole Ann C.

Professor Melinda S. Balbarino

August 15, 2022

Alinsod, Eliseo U.

The Expenditure Cycle

● It is the process of converting cash into physical materials and human resources that are
needed to conduct the business operation.
● It involves the systems in acquiring raw materials from suppliers, most businesses
operate on a credit basis wherein payments are made after the acquisition of the
resources.
● Physical phase refers to the procurement process of acquiring resources. Financial
phase pertains to cash disbursement.

The Conceptual System

● Expenditure cycle is examined conceptually, sequence of activities is traced which

pertains to purchases processing and cash disbursement procedures. This approach
focuses on what needs to be done conceptually and not on how it is physically done,
therefore it can be performed manually or by computer.

Purchases Processing Procedure

● This involves tasks in identifying inventory needs, placing the order, receiving the
inventory, and recognizing liability.
● Generally, applies to both manufacturing and retailing firms, major differences lie in the
way the purchases are authorized. Manufacturing firms purchase for production, and
purchasing decisions are inclined with production planning and control functions.
Merchandising firms purchases for resale

.
Monitor Inventory Records.

● Inventories are depleting through transfer of raw materials to production and selling
finished goods to customers.
● Inventory control monitors and records finished goods inventory level.
● Purchase requisition is prepared and sent to prepare purchase order function if the
inventories dropped to a predetermined reorder point.
● Typically, separate purchase requisition is prepared for each inventory item as the need
is recognized, resulting in multiple purchase requisition and is combined in a single
purchase order. Each purchase order is associated with one or more purchase
requisitions.

Prepare Purchase Order

● Purchase order is prepared for each vendor. A copy of PO is sent to the vendor, another
copy is sent to the set-up accounts payable function for temporary filing of AP pending
file. Blind copy is sent to the receiving goods function where it is held until the
inventories arrive, last copy is filed in the open/closed purchase order file.
● Inventory control function will supply much of the routine ordering information that the
purchasing department needs directly from the inventory and valid vendor files. This
information contains information such as the name and address of the primary supplier,
the economic order quantity, and the standard or expected unit cost of the item.
Receive Goods

● Time lag happens between placing the order and receiving inventory, copies of purchase
order reside in temporary files in different departments. Firm has not received
inventories nor incurred financial obligations.
● Goods arriving from the vendor reconcile with blind copy of the purchase order.
● Blind copy contains no quantity or price information, the purpose of this is to force the
receiving clerk to count and inspect inventories before completing the receiving report.
● After completing physical counts and inspection, the clerk prepares the receiving report.
One copy accompanies physical inventories, another is filed in an open/closed purchase
order file to close out the purchase order, third copy is sent to accounts payable
department where it is filed in AP pending file, fourth copy is sent to inventory control
for updating inventory records, and last copy to receiving report file.
Update Inventory Records

● Standard Cost Systems carry their inventories at a predetermined standard value

regardless of the price actually paid. Posting to standard cost inventory ledger requires
only information about the quantities received.
● Updating the actual cost inventory system requires additional financial information,
such as a copy of the supplier's invoice when it arrives.

Set up Accounts Payable.

● AP function has received and temporarily filed copies of the purchase order and
receiving report. The firm has received inventories, and incurred an obligation to pay for
the goods.
● However, the firm has yet to receive the supplier’s invoice. Thus, they will defer
recording the liability until the invoices arrive.
● Time lag in the recording process technically understates the firm’s liability. Problem
arises at the period-end when the firm is preparing financial statements. As a practical
practice, to close the books the accountant needs to estimate the value of the obligation
before the invoice arrives. Any differences with the estimate and actual invoice if
material is then adjusted.
● When the invoice arrives, Ap clerk will reconcile the information with the receiving
report and purchase order in a pending file, this is known as a three-way match. After
reconciliation, the transaction is recorded in the purchase journal and posted in the
supplier's account in the AP subsidiary ledger.
● If the firm is using an actual cost method in inventory valuation, the invoice should be
sent to the inventory control.
● After recording liability, all source documents (PO, receiving report, and invoice) will be
transferred to the open AP file. Lastly, entries are summarized in the purchase journal
for the period and prepare a journal voucher for the general ledger function.
Voucher Payable System

● The AP department uses cash disbursement vouchers and maintains a vouchers register.
● After the three-way match, the clerk prepares a cash disbursement voucher to approve
payment.
● Vouchers provide control over cash disbursement and allows firms to consolidate
several payments to a single supplier reducing the number of checks written.
● Voucher is recorded in the voucher register, which reflects the AP liability of the firm.
● AP clerk files cash disbursement voucher along with the supporting source document in
the voucher payable file.

·
Post to General Ledger

● The General Ledger function receives a journal voucher from the AP department and an
account summary from inventory control.
● General Ledger function posts from journal voucher to inventory and AP control
accounts. Then reconciles inventory control account to inventory subsidiary summary.
● Approved journal vouchers are posted in the journal voucher file, and the purchase
phase of the expenditure cycle is completed.
Mariñas, James Paul C.

CASH DISBURSEMENT SYSTEMS

● These systems’ processes the payment of obligations created in the purchases system to
ensure that it meets its primary objective that only valid creditors will receive the
subsequent and appropriate payment on time and on the right amount.
● Implementing a properly working cash disbursement system helps avoid late payments
of obligations which could lose purchase discounts or paying too early which forgoes
interest income that it could have earned on the funds

Process flow for Cash Disbursement System

1. Identify Liabilities Due

● The cash disbursement process begins in the Accounts Payable (AP) Department to
determine which items are due. The department is generally to send payment approval
in the form of a voucher packet which contains voucher and any other supporting
documents to the cash disbursements department.

2. Prepare Cash Disbursement

 ● After sending the voucher packet to the cash disbursements department, the cash
disbursement clerk receives the voucher packet and reviews the supporting documents
for completeness and clerical accuracy.
● For each payment of disbursement, the clerk must prepare a check and record all of the
check number, dollar amount of the required payment, voucher number, and other
pertinent information in the check register which is commonly known as the cash
disbursement journal.
● After the documents are marked, the cash disbursement clerk summarizes all entries
made to the check register and sends a journal voucher to the general ledger
department with the entry (Dr: Accounts Payable; Cr: Cash)

3. Update Accounts Payable Records

● Upon the receipt of the voucher packet, the AP clerk must remove the liability by
debiting the AP subsidiary account or the check number and the date of payment in the
voucher register. After the voucher packet is filed in the closed voucher file, an account
summary is prepared and sent to the general ledger.

4. Post To General Ledger

● The voucher which was received must show all the total reductions in the firm’s
liabilities or obligations and appropriate cash account as a result of payments to
creditors or suppliers to prevent the oversight of cash balances.

EXPENDITURE CYCLE CONTROLS

Transaction Authorization

1. Purchases Subsystem
● Purchases of inventory should be authorized by the Inventory Control
Department and not by the purchasing agents. Inventory control function
continually monitors inventory levels to formally authorize replenishments when
inventory levels drop to their predetermined reorder points.
● Unauthorized purchasing can result in excessive inventory levels for some items,
while others go out of stock which could hinder an organization’s
2. Cash Disbursements Subsystem
● The AP function authorizes the payments of bills via the cash disbursement
voucher and not the cash disbursements clerk in order to provide effective
control and verify the authenticity of each check written.

Segregation of Duties

1. Segregation of Inventory Control from the Warehouse

 ● As the primary physical asset in business operations is inventory, inventory
control helps account to the records of the assets while it is in the warehouse in
order to reconcile inventory records to the physical inventory on hand.

2. Segregation of the General Ledger and Accounts Payable from Cash

Disbursements
● The records controlling this asset are the AP subsidiary ledger and the cash
account in the general ledger
● An individual with the combined responsibilities of multiple integral works could
perpetrate fraud against the firm. Hence, the separation of responsibilities could
reduce these types of risks.

Supervision

1. Inspection Of Assets
● All goods that arrive from the suppliers must be inspected by the receiving clerks
to avoid poor qualities of materials such as damages, spoilage and others.

2. Theft of Assets
● Insufficient inspection procedures and supervision may be prone to theft of
inventories in transit resulting in further delays in operations and loss.

Accounting Records

● In order to ensure that all transactions are conducted formally and properly, accounting
records maintain an audit trail as assurance that a transaction can be traced from its
source documents to the financial statements.
● The expenditure cycle employs the following accounting records: Accounts Payable
subsidiary ledger, voucher register, check register, and general ledger.

Access Controls

1. Direct Access
● To secure physical assets such as cash and inventory, direct access controls are
used which includes locks, alarms, and restricted access to areas that contain
important assets to the business.

2. Indirect Access
● To prevent fraudulent transactions which initially appear to be legitimate within
the venture, firms must limit access to documents that control its physical assets
wherein there must only be specific areas or duties that an individual is allowed
to.
INDEPENDENT VERIFICATION

Independent Verification by Accounts Payable

● Key source documents are integral for the business which AP function plays a
vital role for verification of the work of all related departments. These
documents that contain unique facts about purchase transactions are (1)
purchase order, (2) the receiving report, and (3) the supplier’s invoice.

Independent Verification by the General Ledger Department

● The general ledger receives journal voucher and summary reports from their
appropriate sources which is why this function is an important independent
function that reconciles the total obligations recorded equal the total inventories
received and that the total reductions in AP equal the total disbursements of
cash.
Cabungcal, Kimberly Elaine C.

PHYSICAL SYSTEMS
● These systems begins with a review of manual procedures and then moves on to deal
with several forms of computer-based systems.

MANUAL SYSTEM
● It supports the conceptual treatment of systems presented in the previous section. This
should help to envision the relationship between organizational units, the segregation of
duties, and the information flows essential to operations and effective internal control.

1. Inventory Control
- the clerk prepares a purchase requisition when inventories drop to a predetermined
reorder point.
- One copy of the requisition is sent to the purchasing department, and one copy is
placed in the open purchase requisition file.

2. Purchasing Department
- when they receives the purchase requisitions, vendor sorts them and prepares a
multipart PO for each vendor.
- Two copies of the PO are sent to the vendor and one copy of PO is sent to inventory
control, where the clerk files it with the open purchase requisition.
- One copy of the PO is sent to AP for filing in the AP pending file.
- One copy (the blind copy) is sent to the receiving department, where it is filed until the
inventories arrive.
- The clerk files the last copy along with the purchase requisition in the open PO file.

3. Receiving
- the receiving clerk prepares a multipart receiving report stating the quantity and
condition of the inventories.
- One copy of the receiving report accompanies the physical inventories to the
storeroom. Another copy is sent to the purchasing department, where the
purchasing clerk reconciles it with the open PO.
- The clerk closes the open PO by filing the purchase requisition, the PO, and the
receiving report in the closed PO file.
- A third copy of the receiving report is sent to inventory control where (assuming
a standard cost system) the inventory subsidiary ledger is updated.
- A fourth copy of the receiving report is sent to the AP department, where it is
filed in the AP pending file.
- The final copy of the receiving report is filed in the receiving department.

4. AP Department
- When the invoice arrives, the AP clerk reconciles the financial information with
the documents in the pending file, records the transaction in the purchases
 journal, and posts it to the supplier’s account in the AP subsidiary ledger
(voucher register).
- After recording the liability, the AP clerk transfers the source documents (PO,
receiving report, and invoice) to the open vouchers payable (APOK) file.

5. General Ledger Department

- 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. With this step, the purchases phase of the expenditure cycle is completed.

PAYROLL SYSTEM
- Payroll system is a special-case purchases system in which the organization purchases
labor rather than raw materials or finished goods for resale.

The Nature of Payroll system:

1. Payroll system requires special accounting procedures for employee deductions and
withholdings for taxes that do not apply to trade accounts.
2. Payroll system are discrete events in which disbursements to employees occur weekly,
biweekly, or monthly. The task of periodically preparing large numbers of payroll checks
in addition to the normal trade account checks can overload the general purchasing and
cash disbursements system.
3. Writing checks to employees requires special controls. Combining payroll and trade
transactions can encourage payroll fraud.

FIXED ASSET SYSTEM

- A firm’s fixed asset system processes transactions pertaining to the acquisition,
maintenance, and disposal of its fixed assets.

The specific objectives of the fixed asset system are to:

1. Process the acquisition of fixed assets as needed and in accordance with formal
management approval and procedures.
2. Maintain adequate accounting records of asset acquisition, cost, description, and
physical location in the organization.
3. Maintain accurate depreciation records for depreciable assets in accordance
with acceptable methods.
4. Provide management with information to help plan for future fixed asset
investments.
5. Properly record the retirement and disposal of fixed assets.
Fernandez, Trisha Allyson D.

COMPUTER-BASED ACCOUNTING SYSTEM

It is viewed as a continuum (or continuous sequence) between two extremes with automation
at the low end and re-engineering at the high end.
● Automation - involves using technology to improve the efficiency and effectiveness of a
task
● Reengineering - involves replacing traditional procedures with innovative procedures
that are often very different from those previously in place. The objective of
reengineering is to eliminate non value-added tasks.

AUTOMATING PURCHASES PROCEDURES USING BATCH PROCESSING TECHNOLOGY

The sequence of events as they occur in this system revolves basically between the data
processing, purchasing, receiving and accounts payable department.

STEP 1: Data Processing Department

● Determination of affected items to their reorder points - The purchasing process
begins in this department. It determines if the affected items in the inventory
subsidiary file have fallen to their reorder points.
● Creation of records - if the initial step is met, a record is created in the open
requisition file based on the selected information from the inventory subsidiary
record, which is then flagged “On Order”.
● Sorting of the open purchase requisition file - the system will sort the file by vendor
number and consolidate onto a single requisition the multiple items from the same
vendor.
Purchasing Department
● Identification of inventory requirements - this task is done by a computer program
● Preparation of traditional purchase requisitions - before placing the order based
from the requisitions, each of the requisitions is reviewed
○ Methods for authorizing and ordering inventories
■ Alternative 1 - the preparation of the purchase orders are done
automatically. Then, these POs are then sent for review and signing to the
Purchasing Department.
■ Alternative 2 - by direct distribution of the POs to the vendors and internal
users, this alternative speeds up the ordering process but bypasses the
purchasing department in the process.
■ Alternative 3 - this method represents a reengineering technology known as
the Electronic Data Interchange (EDI) and does not produce physical
purchase orders.
STEP 2: Data Processing Department
● Sending a copy of the PO to data processing - this will be used to create a record
● Creation of records - the record will be created in the open PO file whereas the
associated requisitions will be transferred to the closed purchase requisition file
Receiving Department
● Preparation of receiving report - done by the receiving clear after the goods arrive
from vendors
● Sending of copies to other departments - which includes the purchasing, AP and data
processing departments
STEP 3: Data Processing Department
● Creation of the receiving report file - created from data provided by the receiving
report documents
● Updating of inventory subsidiary file - will be done by a batch program from the file
of the receiving report, thus, removing the “On Order” flag from the updated
inventory records
● Calculation of batch totals - of inventory receipts, which the procedure of updating
the general ledger will use
Accounts Payable
● Reconciling of supplier's invoice with the supporting documents - done by the AP
clerk after the receipt of the supplier’s invoice with the documents that were
previously place in the pending file of AP
STEP 4: Data Processing Department
● Creation of voucher file- created from voucher documents
● Validation of voucher records - done by a batch program against the valid vendor file
and adds them to the voucher register
● Preparation of batch totals - prepared for subsequent posting to the AP control
account in the general ledger
CASH DISBURSEMENT PROCEDURES

Data Processing Department

● Scanning of vouchers currently due - done each day by the system wherein checks
are printed for these items
● Recording of checks - recorded in the cash disbursements journal containing the
check number which are sent to the cash disbursements department along with the
transaction list
● Preparation of batch totals - of the closed AP and cash disbursements whereas the
totals of closed AP and cash disbursements should balance
Cash Disbursements Department
● Reconciliation and mailing of checks - the checks are reconciled with the transaction
listing where the negotiable portion is submitted for signing to the management
● Sending of copy of each check to AP - after the checks are mailed to suppliers
● Filing in cash disbursements - the copy is filed along with the transaction listing
Accounts Payable Department
● Matching of check copies with open vouchers - upon receipt of the check copies
● Concludes the expenditure cycle process
Martinez, Mark Ian G.

REENGINEERING THE PURCHASES/CASH DISBURSEMENTS SYSTEM

The automated system described in the previous section simply replicates many of the
procedures in a manual system. In particular, the AP task of reconciling supporting documents
with supplier invoices is labor-intensive and costly.

Data Processing
The following tasks are performed automatically.
● The Inventory file is searched - for items that have fallen to their reorder points.
● A record is entered in the purchase requisition file - for each item to be replenished.
● Requisitions are consolidated - according to vendor number.
● Vendor mailing information is retrieved - from the valid vendor file.
● Purchase orders are prepared - and added to the open PO file.
● A transaction listing purchase orders is sent to the purchasing department - for
review.

Receiving Department
When the goods arrive, the receiving clerk accesses the open PO file in real time by entering the
PO number taken from the packing slip.
Data processing
● Quantities of items received are matched against the open PO record, and a Y value is
placed in a logical field to indicate the receipt of inventories.
● A record is added to the receiving report file.
● The inventory subsidiary records are updated to reflect the receipt of the inventory
items.
● The general ledger inventory control account is updated.
● The record is removed from the open PO file and added to the open AP file, and a
due date for payment is established.

Each day, the DUE DATE fields of the AP records are scanned for items due to be paid. The
following procedures are performed for the selected items.
1. Checks are automatically printed, signed, and distributed to the mail room for mailing to
vendors. EDI vendors receive payment by electronic funds transfer
2. The payments are recorded in the check register file.
3. Items paid are transferred from the open AP file to the closed AP file.
4. The general ledger AP and cash accounts are updated.
5. Reports detailing these transactions are transmitted via terminal to the AP and cash
disbursements departments for management review and filing.

Because the financial information about purchases is known in advance from the trading
partner agreement, the vendor’s invoice provides no critical information that cannot be derived
from the receiving report.
Esmeria, Nhicole Ann C.

REENGINEERING THE PAYROLL SYSTEM

This system is different from the manual system in terms of the following:
1. Transactions from multiple departments are transmitted to data processing through
terminals.
2. Direct access files are used for data storage.
3. Numerous procedures are conducted in real time.

CONTROLLING FIXED ASSET SYSTEM

1. Authorization Controls - there must be an explicit authorization through a written

request or an independent approval process.
2. Supervision Controls - it is necessary in the system to prevent theft and
misappropriation of inventories.
3. Independent Verification Controls - the location, condition, and fair value of a fixed
asset must be validated.

CONTROL IMPLICATIONS

The control implications in this chapter focus on the expenditure cycle issues by differentiating
between an automated and a reengineered system.

Automated System
1. Improved Inventory Control
An automated system is more advantageous than a manual system in managing
inventory; hence, there is less risk of inventory surplus and deficit. However, firms may
feel overwhelmed in keeping their inventory. That is why monitoring an automated
decision is necessary and the firm must provide enough summary reports of their
purchases.

2. Better Cash Management

Early payments and missed due dates are avoided in an automated system
because it scans voucher files of due items daily. Also, it increases the effectiveness and
accuracy of cash management and reduces time and cost in writing checks. The firm
shall verify all additions to the voucher file by checking if the vendor number on the
voucher is on the valid vendor file. Any missing voucher number shall be recorded on an
error file for management review. The manager controls the cash disbursement because
the manager signs the checks manually in this system; although, many computer
systems automate the signing of the same, which is relatively more efficient than
physical signing. To avoid risks, firms may set a threshold for writing the check. Checks
that meet or exceed the threshold are signed by the treasurer or an authorized
manager, while checks that fall below the threshold are signed automatically.
 3. Time Lag
There is a time lag between the arrival and recording of inventory, and this lag
may unfavorably affect the sales process. Also, sales may be lost if the current inventory
condition is not known.

4. Purchasing Bottleneck
The purchasing department is directly involved in the purchasing decisions of the
firm, which equates to more work; thus, it prolongs the process of ordering. With the
help of an automated system, agents are freed from regular tasks like preparing and
mailing purchase orders. It allows firms to focus on problem areas and reduce
purchasing employees.

5. Excessive Paper Documents

Paper documents may be a burden to an automated system. Operations
departments undergo the creation of documents, processing of data, and conversion of
the same to the magnetic media. Also, paper documents have purchasing, storage,
preparation, handling, and conversion costs. Reducing paper documents in the system
would be advantageous, especially for firms with high-volume transactions.

The Reengineered System

- It utilizes real-time processes and direct access files to reduce record-keeping lag time.
- It reduces regular clerical operations through the distribution of terminals to user areas.
- It achieves a considerable decrease in paper documents through digital storage and
department interactions.

1. Segregation of Duties
There is no segregation of duties in this system, and the computer system both
authorizes and processes purchase orders, and the same goes with checks. The system
provides transaction listings and summary reports that enable management to identify
errors and significant events that require further study to mitigate risks.

2. Accounting Records and Access Controls

Advanced systems store accounting records digitally with minimal to zero hard-
copy back-ups. The organization management must secure accounting records from
unauthorized access and destruction under the legislation of Sarbanes-Oxley.