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chapter

The expenditure
cycle

13

Learning objectives
To learn the expenditure cycle business
activities.
To learn how to flow chart the expenditure cycle
business activities.
To understand the processing of expenditure
cycle transactions using a computer.
To know what the control practices and
procedures are in the expenditure cycle.
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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key terms
carrying costs
economic order
quantity
materials requisition
note
maximum stock level
minimum stock level

ordering costs
payment voucher
purchase requisition
reorder level
reorder quantity
storekeeping

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information


& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Expenditure cycle
Deals with transactions involved in
purchasing goods and services
Custodianship of goods and materials
purchased
Cash and credit payments

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information


& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Expenditure cycle business


activities
Main functions (cash purchase):
requests for purchases
ordering goods to be purchased
receiving delivery of goods purchased
storekeeping
dealing with goods to be returned
payment of purchased goods and services
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Expenditure cycle business


activities
Additional functions (credit purchase):
applying for credit facility from supplier
recording accounts payable
requesting adjustment notes
checking periodical statements from suppliers
approving vendor invoices

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information


& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Expenditure cycle business


activities
Categories of activities in the expenditure cycle:
1. Requesting purchases
2. Placing orders with suppliers
3. Receiving goods
4. Storekeeping
5. Processing supplier invoices
6. Cash disbursements
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Requesting purchases
Purchasing department responsible for
purchases
Goods categorised as:
general goods
special items

Purchase requisition used for special orders


to ensure:
control and accuracy
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Placing orders with suppliers


This is achieved by:
identifying supplier
price and quantity available
delivery time
terms and delivery

placing the order with supplier


in writing on serially numbered forms
description, quantity, unit price, total price, trade discount
and delivery date
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

13-8

Receiving goods
Goods accompanied by delivery note showing:
description, source and quantity delivered
space for signature of person accepting goods

Goods checked for quantity and quality


Goods received note raised and attached to delivery
note for filing. A copy is sent to accounts payable
department
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Storekeeping
Goods received are stored in a secure place
Safeguarded by authorised persons
Released on proper authorisation
goods/materials requisition note
Authorised dispatch note required for
dispatch of goods sold

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information


& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Storekeeping functions

Maintain orderly store


Prevent waste and deterioration of goods
Secure from unauthorised personnel
Keep records and issue goods
Raise purchase requisitions
Receive goods delivered

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information


& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Stock levels
Maintain appropriate level to facilitate
production and sales functions
Maintain a buffer of stock for emergencies

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information


& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Physical stock verification


Inventory is counted and amounts and other details are
recorded on stock sheets
Verification objectives are:
accounting valuation
loss through theft or misuse
physical state of stock
allow proper cut-off procedures to be carried out (i.e.
inventory is counted only if invoices have been received
and processed)
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Perpetual inventory system


Maintains a set of records that ensure that stock
movements are recorded on a continuous and
consistent basis by competent staff
Stock cards maintain a record of stock movements
in the stores
Accuracy is verified by a stocktake
Physical stock is compared to records to identify
errors
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Processing supplier invoices


Tax invoice is received and checked for
accuracy using goods received note
Liability is recorded when tax invoice is
received and verified
Accounts payable may be adjusted by
adjustment or credit notes received for
returned goods
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Cash disbursements
The activity of settling a debt by paying for the goods
and services received completes the expenditure cycle
Supplier payments may take the form of:

cash
cheques most common form of payment
bank transfers
direct deposits or EFT

Details of all payments are recorded in the cash


payments journal
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Flowchart for purchasing function

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information


& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Flowchart for purchase returns


function

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information


& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Internal controls for expenditure


cycle

Prenumbered purchase orders


Authorised personnel to initiate all purchases
Deliveries accepted on verification of purchase order
Invoices, purchase orders and receiving reports
matched to verify invoice for processing and
payment
Expected refunds are followed up
Paid invoices are cancelled with a stamp paid or
punch
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Internal controls for expenditure


cycle (cont.)

Cheque signatories have limits


Authorised person responsible for petty cash fund
Accounts payable is reconciled on a regular basis
Inventory is protected and accounted for both
physically and in terms of dollar value
Reorder levels are maintained
Proper authorisation procedures apply for release of
goods from stores
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Computer application systems for


the expenditure cycle
Computers play an important role where large numbers
of transactions are processed:
record the information in the same categories as a
manual system
quick production of the documentation required
reduce clerical handling errors
easily generate detailed reports for management use
reduce errors in pricing etc.
enable maintenance of large perpetual inventory systems
with a minimum amount of labour costs
2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information
& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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Controls in the computer environment


Application controls required:
Input controls
detect and prevent errors when data is input

Processing controls
detect and prevent errors while processing is in progress

Output controls
detect and prevent errors in outputs from processing

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information


& Reporting Systems by A. Aseervatham and D. Anandarajah. Slides
prepared by Kaye Watson.

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