Chapter 5 The Expenditure Cycle Part I: Purchases and Cash II. PREPARE PURCHASE ORDER.

Disbursements Procedures *The prepare purchase order function receives the purchase
requisitions, which are sorted by vendor if necessary.
The Conceptual System *Purchase order (PO) is prepared for each vendor
- intended to be technology-neutral * Copies of Purchase Order:
- the sequence of activities through two of the processes that o Vendor
constitute the expenditure cycle for most retail, wholesale, o To set up A/P functions- for filing temporarily in the
and manufacturing organizations AP pending file
1. purchases processing o Blind copy is sent to the receive goods function
2. cash disbursements procedures. o last copy is filed in the open/closed purchase order
Purchases Processing Procedures file.
*Purchases procedures - include the tasks involved in identifying *valid vendor files
inventory needs, placing the order, receiving the inventory, and - supplied by the inventory control function along with much of
recognizing the liability. the routine ordering information that the purchasing
*Production planning and control function- authorize Manufacturing department needs directly from the inventory to make the
firm’s purchasing decisions purchasing process efficient
*Inventory control function - provides the purchase authorization of - contributes to both control and efficiency by listing only those
Merchandising firms vendors approved to do business with the organization (helps
I. MONITOR INVENTORY RECORDS. to reduce certain vendor fraud schemes)
*Purchase requisition- When inventories drop to a predetermined III. RECEIVE GOODS
reorder point, is prepared and sent to the prepare purchase order - Goods arriving from the vendor are reconciled with the blind
function. copy of the PO.
Contains inventory subsidiary ledger and valid vendor file for *blind copy - contains no quantity or price information about the
efficiency and purposes. products being received
 - to force receiving clerk to count & inspect inventories
bago gumawa the receiving report.
* receiving report – prepared by the receiving clerk pagtapos of the
physical count and inspection
- stating the quantity and condition of the inventories
* Copies of Receiving Report
o accompanies the physical inventories
o open/closed PO file- to close out the PO
o AP department, where it is filed in the AP
pending file
o inventory control
o in the receiving report file
IV. 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.
V. SET UP ACCOUNTS PAYABLE.
- -At this point in the process, however, the firm has not
received the supplier’s invoice containing the financial
information needed to record the transaction.
Three-way match - When the invoice arrives, the AP clerk reconciles
the financial information with the receiving report and PO in the
pending file
- verifies that what was ordered was received and is
fairly priced
AP subsidiary ledger - Once the reconciliation is complete, the
transaction is recorded in the purchases journal and posted to the
supplier’s account
inventory valuation method - will determine how inventory control
will have recorded the receipt of inventories
- If the firm is using the actual cost method, the AP clerk would
send a copy of the supplier’s invoice to inventory control
Open AP file - after recording the liability, the AP clerk transfers all
source documents here
- organized by payment due date and scanned daily to ensure that
debts are paid on the last possible date without missing due dates and
losing discounts
* Finally, the AP clerk summarizes the entries in the purchases journal
for the period (or batch) and prepares a journal voucher for the
general ledger function
Vouchers Payable System
- the AP department uses cash disbursement vouchers and
maintains a voucher register
 - After the AP clerk performs the three-way match, he or she
prepares a cash disbursement.
voucher to approve payment.
Vouchers - provide improved control over cash disbursements and
allow firms to consolidate several payments to the same supplier on
single voucher
voucher register - Each voucher is recorded in here.
-reflects the AP liability of the firm
vouchers payable file - The AP clerk files the cash disbursement
voucher, along with supporting source documents here.
V. POST TO GENERAL LEDGER
General ledger function posts the data contained in the journal
voucher to the inventory and AP control accounts and reconcile the
inventory control account with inventory subsidiary summary.
CASH DISBURSEMENT SYSTEM
The payment of the obligation created in the purchases system.
I. IDENTIFY LIABILITIES DUE
voucher packet - Each day, the AP function reviews the open AP file
(or vouchers payable file) for such items and sends payment approval
in this form
II. PREPARE CASH DISBURSEMENT for completeness and clerical
accuracy.
check register- also called the cash disbursements journal,
- For each disbursement, the clerk prepares a check and
records the check number, dollar amount, voucher number,
and other pertinent data here
a. The negotiable portion of check is mailed to supplier, & a
copy of it is attached to the voucher packet as proof of
payment.
b. The clerk marks the documents in the voucher packets
paid and returns them to the AP clerk.
c. the cash disbursements clerk summarizes the entries
made to the check register and sends a journal voucher
III. UPDATE AP RECORD
- Upon receipt of the voucher packet, the AP clerk removes the
liability
- The voucher packet is filed in the closed voucher file
- account summary is prepared and sent to the general ledger function
IV. POST TO GENERAL LEDGER 3. AP for filing in the AP pending file.
4. (blind copy) receiving department- where it is filed until
the inventories arrive.
5. last copy along with the purchase requisition in the open
PO file.
Receiving
• copy of receiving report
1. storeroom- accompanies the physical inventories
2. purchasing department - reconciles it with the open PO
o closed PO file- clerk closes the open PO by filing
the purchase requisition, the PO,
Physical Systems and the receiving report here
3. inventory control - the inventory subsidiary ledger is
A MANUAL SYSTEM
updated

Inventory Control 4. AP department, where it is filed in the AP pending file.

5. receiving department.
• copy of the requisition is sent to AP Department
1. the purchasing department,
2. the open purchase requisition file. - After recording the liability, the AP clerk transfers the source
documents (PO, receiving report, and invoice) to the open
Purchasing Department vouchers payable (APOK) file.

• copies of the PO are sent to: General Ledger Department

1. Two sent to the vendor
2. inventory control - clerk files it with the open Receives journal voucher from AP dept. and account summary from

purchase requisition inv. Cntrl.

THE CASH DISBURSEMENTS SYSTEMS
AP Department
- Each day, the AP clerk reviews the open vouchers payable
(AP) file for items due and sends the vouchers and supporting
documents to the cash disbursements department.
Cash Disbursements Department
- For each disbursement, the clerk prepares a three-part check
and records the check number, dollar amount, voucher
number, and other pertinent data in the check register.
AP Department
- Upon receipt of the AP packet, the AP clerk removes the
liability by recording the check number in the voucher
register and filing the voucher packet in the closed voucher
file.
General Ledger Department
ADVANCED TECHNOLOGY EXPENDITURE CYCLE
INTEGRATED PURCHASES PROCESSING SYSTEM
Reengineering
- involves replacing traditional procedures with innovative
procedures that are often very different from those previously
in place.
- to eliminate nonvalue–added tasks.
AUTOMATING PURCHASES PROCEDURES USING BATCH
PROCESSING TECHNOLOGY
Data Processing Department: Step 1
- When inventories are reduced by sales to customers or usage
in production, the system determines if the affected items in the
inventory subsidiary file have fallen to their reorder points
- If reached reorder point, recordis created in the open
purchase requisition file
- the system sorts the open purchase requisition file by vendor
number
- vendor mailing information is retrieved from the valid vendor
file to produce hard copy purchase requisition documents
Purchasing Department
- receive purchase requisition, prepares a multipart PO
- copies are sent to the vendor, AP, receiving, data processing,
and the purchasing department’s file.
- A computer program identifies inventory requirements and
prepares traditional purchase requisitions,
- 3 alternative approaches for authorizing and ordering
inventories
1. system automatically prepares the PO documents and sends
them to the purchasing department for review and signing. The
purchasing agent then mails the approved POs to the vendors
and distributes copies to other internal users.
2. distributing the POs directly to the vendors and internal
users, thus bypassing the purchasing department completely.
system produces a transaction list of items ordered for the
purchasing agent’s review.
3. electronic data interchange - computer systems of both the
buying and selling companies are connected via a dedicated
telecommunication link
Data Processing Department: Step 2
- copy of the PO is sent to data processing and used to create a
record in the open PO file.
- The associated requisitions are then transferred from the
open purchase requisition file to the closed purchase
requisition file.
Receiving Department
- When the goods arrive from vendors, the receiving clerk
prepares a receiving report and sends copies to the stores (with
the goods), purchasing, AP, and data processing.
Data Processing Department: Step 3
- The data processing department creates the receiving report
file from data provided by the receiving report documents.
- batch program updates the inventory subsidiary file from the
receiving report file.
- The program removes the ‘‘On Order’’ flag from the updated
inventory records and calculates batch totals of inventory
receipts
Accounts Payable
- AP clerk receives the supplier’s invoice, he or she reconciles it
with the supporting documents that were previously placed in
the AP pending file
- clerk then prepares a voucher, files it in the open voucher file
- sends a copy of the voucher to data processing.
Data Processing Department: Step 4
- The voucher file is created from the voucher documents
- batch program validates the voucher records against the valid
vendor file and adds them to the voucher register
- batch totals are prepared for subsequent posting to the AP
control account
CASH DISBURSEMENTS PROCEDURES
Data Processing Department
- system scans the DUE DATE field of the voucher register for
items due.
- The check number is recorded in the voucher register to close PURCHASES SUBSYSTEM
the voucher and transfer the items to the closed AP file
- Unauthorized purchasing can result in excessive inventory
Cash Disbursements Department levels for some items

- reconciles the checks with the transaction listing and submits IT control
the negotiable portion of the checks to management for signing
AUTOMATED PURCHASE APPROVAL
- Copy of checks: AP, cash disbursements(w/ transaction
listing) Receiving wrong items, incorrect quantities and damaged goods

Accounts Payable Department Physical control

- AP clerk matches them with open vouchers and transfers INDEPENDENT VERIFICATION
these now closed items to the closed voucher file.
INDEPENDENT VERIFICATION BY ACCOUNTS PAYABLE
EXPENDITURE CYCLE CONTROLS
- AP clerk must reconcile before the firm recognizes an
Objective of internal control is to mitigate the risk from errors
Obligation RECEIVING DEPARTMENT
and fraud.
SUPERVISION RECEIVING DEPARTMENT
• Unauthorized inventory purchases
• Receiving wrong items, incorrect quantities and - In the expenditure cycle, the receiving department is the
damaged goods
• Inaccurate record of purchases and cash disbursement area that most benefits from supervision
transactions in journal and accounts
• Misappropriation of cash and inventory - Close supervision here reduces the chances of two types of
• Unauthorized access to accounting records and
exposure:
confidential reports
(1) failure to properly inspect the assets and
Unauthorized inventory purchases
(2) the theft of assets.
Physical control
INSPECTION OF ASSETS
TRANSACTION AUTHORIZATION formal purchase requisition
packing slip - containing quantity information that could be
usedto circumvent the inspection.
process often accompanies incoming goods.
*A supervisor should take custody of the packing slip while
receiving clerks count and inspect the goods.
IT control
SCANNER TECHNOLOGY
Inaccurate record of purchases and cash disbursement
transactions in journal and accounts
Physical control
TRANSACTION AUTHORIZATION
CASH DISBURSEMENTS SUBSYSTEM
*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.
ACCOUNTING RECORDS
to maintain an audit trail adequate for tracing a transaction
from its source document to the financialstatements.
- The expenditure cycle employs the following accounting
records.
✓ AP subsidiary ledger
✓ voucher register
✓ check register
✓ general ledger
INDEPENDENT VERIFICATION
INDEPENDENT VERIFICATION BY THE GENERAL LEDGER
DEPARTMENT
1. The PO, which shows that the purchasing agent ordered only
the needed inventories from a valid vendor. This document
should reconcile with the purchase requisition.
2. The receiving report, which is evidence of the physical
receipt of the goods, their condition, and the quantities
received. The reconciliation of this document with the PO
signifies that the organization has a legitimate obligation.
3. The supplier’s invoice, which provides the financial
information needed to record the obligation as an account
payable. The AP clerk verifies that the prices on the invoice are
reasonable compared with the expected prices on the PO.
- The general ledger function provides an important
independent verification in the system.
IT control
INPUT DATA EDITS
ERROR MESSAGES
AUTOMATED POSTING TO SUBSIDIARY AND GL ACCOUNTS
FILE BACK UP DIRECT ACCESS

Misappropriation of cash and inventory - Direct access controls include locks, alarms, and restricted
access to areas that contain inventories and cash.
Physical control
INDIRECT ACCESS.
SUPERVISION
- A firm must limit access to documents that control its physical
SEGREGATION OF INVENTORY CONTROL FROM THE assets.
WAREHOUSE
SEGREGATION OF DUTIES
- Within the purchase's subsystem, the primary physical asset is
inventory IT control

- Inventory control keeps the detailed records of the asset, PASSWORD CONTROL
while the warehouse has custody
MULTILEVEL SECURITY to prevent unauthorized access to
SEGREGATION OF THE GENERAL LEDGER AND ACCPAYABLE data
FROM CASH DISBURSEMENTS.

The asset subject to exposure in the cash disbursements

subsystem is cash.

IT control

AUTOMATED THREE WAY AND PAYMENT APPROVAL

MULTI LEVEL SECURITY to provide segregation of duties

Unauthorized access to accounting records and confidential

reports

Physical control

ACCESS CONTROL