Purchases & Payments

Cycle
 P URCHASE & PAYMENT C YCLE

 Four functions in the cycle :

 Ordering of goods / services from suppliers
(Cash or Credit – local or foreign)
 Receiving goods from suppliers
 Recording of purchases
 Payments to suppliers for goods or services
(paying creditors or cash payments)
 O RDERING
• Centralized department in organization
Procurement
• Most reliable and cost efficient supplier
Dept
• Vetted and Approved suppliers list

• Buyer to source goods

• Best price, quality, shortest delivery etc.
Requisition • Requisition – standard format doc (Authorised by Dept Head)

• Pre-numbered
Purchase • Triplicate = 1) procurement 2) Supplier 3) Receiving Department
Order • Approved by chief buyer
(P/O)
 R ECEIVING
• Receiving clerk – supplier D/N = P/O
• Agrees quantities ordered with delivered
Goods • Superficial quality check
Delivered • Additional measures – CCTV cameras

• If goods need to be returned

• Pre-numbered
Credit notes • Approved by Purchases Manager

• Pre-numbered GRN
• Stating actual quantity received.
GRN issued • Attach P/O + D/N + C/N (if applicable) (3 way matching)
 R ECORDING

• Prepare grid stamp

• Agree Price/Quantity/VAT/Recalc
• All supporting docs attached (P/O + D/N + GRN + C/N(if
Acc Clerk appl))

Liability is • Payment becomes due

Raised
 PAYMENT

• Creditors recon performed

• Cr statement received = invoices = payments made
Prep of • Payment Requisition – Creditors clerk
payment

• Payment Req + all sup doc = Authorized signatories

• Always 2 signatories
Presentation • Agree = Amount/payee/date/cancel supp doc’s
of Requisition before sign
 DOCUMENTS USED IN THE P&P CYCLE

 Table in the textbook (Function – Docs – Risks)

 Requisition

 Order

 Delivery note

 Goods Received Note (GRN)

 Invoice

 Credit Note

 Creditor statement

 Cheque requisition

 Remittance advice

 Receipt

 Logs, variance reports (computerized system)

 DOCUMENTS IN THE FUNCTIONAL
AREA
Requistion

Order form Ordering function

Supplier delivery note

Goods received note Receiving function

Credit note

Purchase invoice Recording function

Creditors statements

Payment requisitions Payment (Preparation of payment)

Remittance advice

Receipt Payment (Payment)

EFT – Proof of payment

FLOWCHARTS (PURCHASES &
PAYMENTS) FOR A MANUAL
CYCLE
FLOWCHARTS FOR A MANUAL
P&P CYCLE
FLOWCHARTS FOR A MANUAL
P&P CYCLE
 COMPUTERISED P&P CYCLE

 Access

 Menus

 Integration of the system (updating accounting records)

 Electronic Data Interchange (EDI)

 Screen aids and programme (automated) checks

 Logs and reports

 Matching and minimum entry

 On systema approval

 Audit trail
 C ONTROL OBJECTIVES - P URCHASES
 Purchase transactions are valid
 (validity)=(occurred & authorized)
 Purchase transactions have been properly authorized (authorization)
 Purchase transactions shown at the correct values (accuracy)
 Purchase transactions are classified correctly (classification)
 Purchase transactions recorded correctly (recording)
 All purchase transactions have been recorded (completeness)
 Purchase transactions recorded timeously in the correct period (cut-off)
 WHAT CAN GO WRONG?
 What can go wrong in the Purchases and Payments cycle (Risks)?
o Orders:
not properly authorised
not carried out timeously
not at best prices/conditions
Incorrect goods ordered

o Goods received:
not recorded (stock, purchases, creditors) or not accurately recorded
o Recording (Payments made):
for goods not received
at wrong prices
discounts not utilised
CONTROLS
 CONTROLS
P URCHASES
 Occurrence (Validity):
 All recorded purchases are valid and supported by proper
documentation
 From accounting records to source documentation (Flow of
documentation NB)
 CONTROLS
P URCHASES

Authorisation:
 All purchases are authorised according to company policy
 Signatures
 CONTROLS
P URCHASES

 Completeness:
 All valid purchase transactions are recorded and nothing is left out
▪ From source documentation to accounting records (Flow of
documentation NB!)
 CONTROLS
P URCHASES

 Accuracy:
 All orders are carried out accurately. All purchase transactions are
accurately recorded at the correct quantity, at the correct amount
and are arithmetically correct
 CONTROLS
PURCHASES

 Recording:
 All purchase transactions are correctly recorded
▪ Posting: Invoice - PJ – CL - GL
 CONTROLS
P URCHASES

 Classification:
 All purchase transactions are correctly classified according to the
nature thereof.
 External vs internal
 CONTROLS
P URCHASES

 Cut off:
 All purchase transactions are recorded in the correct reporting
period.
 CONTROLS

PAYMENTS
 C ONTROL OBJECTIVES - PAYMENTS
 Validity of payments
 authorized, to valid accounts payable

 Accurate recording of payments

 details on cheques/EFT checked to documentation

 debit to creditor’s account and control account and credit to cash

 Completeness of payments recording

 all payments recorded

 in correct accounting period

 PAYMENTS
Recording of payments
 Independent of persons who draw, sign or handle cheques / EFT
transfers
 Cheques returned from bank not available to person who keeps
accounts payable record
 No access to control account by person maintaining sub ledger
 Regular reconciliation by independent person
 Individual creditors reconciliations
 EFT – Bank module (Sage Pastell)
 CONTROLS
PAYMENTS
 Occurrence (Validity):
 All payments on creditors accounts are valid and are supported by
proper documentation
 From accounting records to source documentation (Flow of
documentation NB)
 CONTROLS
PAYMENTS
Authorisation:
 All payments are authorised according to company policy
 Signatures
 CONTROLS
PAYMENTS
 Completeness:
 All payments are correctly recorded
 From source documentation to accounting records (Flow of
documentation NB!)
 CONTROLS
PAYMENTS
 Accuracy:
 Payments are made at the correct amount and is
arithmetically correct
 CONTROLS
PAYMENTS
 Recording:
 All payments are correctly recorded.
▪ Posting: Payment advice - CL - GL
 CONTROLS
PAYMENTS
 Classification:
 All payments classified to the correct creditor's account
 Payments are Coded
 CONTROLS
PAYMENTS
 Cut off:
 All payments recorded at date of payment per payment
advice and date of cheque
 GENERAL CONTROLS - OVERALL
Establish whether the control environment supports the control procedures
o Supervision and review
o Segregation of duties
o Rotation of duties
o Personnel take leave regularly
o Management control
o Internal audit
o Sufficient stationery control
Scrutinise all records and documents for extraordinary items.
Test castings and calculations on all selected items, documents and ledger
accounts.
 D OCUMENTATION FLOW
P URCHASES
 Requisitions
 Orders
 Goods received note (GRN)
 Delivery notes from suppliers
 Invoices from suppliers
 Credit notes
 Purchase journal
 Creditors account and creditors journal
 Creditors control account in the general ledger
 Creditor statements
 Remittance advice/ Cheque req.
 E ND OF THE LECTURE
 NB – Understand the basics in these slides and use the textbook to understand
the detail.