CHAPTER 5

The Expenditure Cycle Part 1:

Purchases and Cash Disbursements
Procedures
 PURCHASES PROCESSING
PROCEDURES
 Monitor Inventory Records
 Prepare Purchase Order
 Receive Goods
 Update Inventory Records
 Set Up Accounts Payable

 VOUCHER PAYABLE SYSTEM

 CASH DISBURSEMENTS SYSTEMS

 Identify Liabilities Due

 Prepare Cash Disbursement
 Update AP Record
 Post to General Ledger
EXPENDITURE CYCLE CONTROLS
 TRANSACTION AUTHORIZATION
 Purchase Subsystem
 Cash Disbursement Subsystem

 SEGREGATION OF DUTIES
 Segregation of Inventory Control from the
Warehouse
 Segregation of the G/L and AP from Cash
Disbursements
 SUPERVISION
 Inspection of Assets
 Theft of Assets

 ACCOUNTING RECORDS

 ACCESS CONTROLS
 Direct Access
 Indirect Access
 INDEPENDENT VERIFICATION
 Independent Verification by Accounts Payable
 Independent Verification by the G/L Department
MANUAL PURCHASES SYSTEM –
INVENTORY CONTROL & PURCHASING
 Starts
in Inventory Control department when
Supervisor writes Memo to have Clerk
check Inventory levels.

 Clerkprepares purchase requisition (PR)

and sends copies to Purchasing and
Accounts Payable. One copy filed by # in
I.C. Dept.
MANUAL PURCHASES SYSTEM –
PURCHASING (CONTINUED)
 Purchasing Dept. prepares purchase
order (PO) for each vendor and sends
copies to Inventory Control, Accounts
Payable, Receiving (blind copy), and
Vendor. One copy is filed
alphabetically in the Purchasing
Department, along with PR.
MANUAL PURCHASES SYSTEM –
RECEIVING
 Uponreceipt of goods, Receiving Dept.
counts/inspects goods.
Purpose of “blind” copy of P.O. is to force
workers to count goods.

 Clerk prepares Receiving Report

sends copies to Warehouse, Purchasing,
Inventory Control, and Accounts Payable.
One copy is filed alphabetically in
Receiving Dept.
MANUAL PURCHASES SYSTEM –
ACCOUNTS PAYABLE
 Accounts Payable Dept. now has copies of
purchase requisition, purchase order, and
receiving report.
 Upon receipt of supplier’s invoice, Accounts
Payable reconciles all documents, records
in purchases journal, and posts liability in
AP subsidiary ledger.
 All documents are sent to Cash
Disbursements Dept.
MANUAL PURCHASES SYSTEM (CONTD)
 Periodically
Journal voucher is
prepared by Accounts Payable and
sent to General Ledger Dept.

MANUAL CASH DISBURSEMENTS

SYSTEM
 Cash Disbursements Dept.
 prepares check
 records information in check register (cash
disbursements journal)
 forwards all documents to Treasurer for signature.
 periodically sends journal voucher to General Ledger.
Computer-Based Purchases and
Cash Disbursement Application

Automatic Purchases
Procedures using
Batch Processing
Technology
 DESCRIBES THE SEQUENCE OF
THE EVENTS AS THEY OCCUR IN
THIS SYSTEM:
 Data Processing Department: Step 1
- Purchasing department
 Data Processing Department: Step 2
- Receiving Department
 Data Processing Department: Step 3
- Accounts Payable
 Data Processing Department: Step 4
- Voucher File
COMPUTER-BASED PURCHASES SYSTEM
COMPUTER-BASED PURCHASES SYSTEM
 RECORD STRUCTURE FOR
EXPENDITURES CYCLE FILES
ALTERNATIVE ONE
ALTERNATIVE TWO
ALTERNATIVE THREE
CASH DISBURSEMENT
PROCEDURES

DataProcessing Department
Cash Disbursement
Department
Accounts Payable Department
 TASK THAT ARE PERFORMED AUTOMATICALLY
 Data Processing
- 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 of POs is sent to the
purchasing department for review.
RECEIVING DEPARTMENT
 TASK THAT ARE PERFORMED AUTOMATICALLY

 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.
CONTROL IMPLICATION
The Automated System
The Reengineered System

THE AUTOMATED SYSTEM

Improved Inventory Control
Better Cash Management
Time Lag
Purchasing Bottleneck
Excessive Paper Documents
THE REENGINEERED SYSTEM
 Segregation of Duties
 Accounting Records and Access
Controls