Chapter 5
The Expenditure
Cycle
Part I: Purchases
and Cash
Disbursements
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Objectives for Chapter 5
 Tasks performed during purchases and cash
disbursement processes
 Departments involved in purchases and cash
disbursement activities and the flow of these
transactions through the organization
 Documents, journals, and accounts that provide audit
trails, promote the maintenance of records, and support
decision making and financial reporting
 Risks associated with purchase and cash disbursements
activities and the controls that reduce these risks
 Operational features and the control implications of
technology used in purchases and cash disbursement
systems
Purchase Requisition
Purchasing
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PROCUREMENT CYCLE
(SUBSYSTEM)
Receiving/
Inspection
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Cash Disbursements
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Accounts Payable
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Goals of Expenditure Cycle
 Goal of providing needed resources to organization can
be broken down into several objectives:
purchase from reliable vendors
purchase high quality items
obtain best possible price
purchase only items that are properly authorized
have inventory available when needed
receive only those items ordered
ensure items are not lost, stolen, or broken
pay for the items in a timely manner
Take advantage of cash discounts
Manual Purchases System –
Inventory Control & Purchasing
Starts in Inventory Control department when
Supervisor writes Memo to have Clerk check
Inventory levels.
Clerk prepares purchase requisition (PR) and
sends copies to Purchasing and Accounts
Payable. One copy filed by # in I.C. Dept.
See next slide
for flowchart
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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.
See next slide
for flowchart
(yellow
symbols)
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Manual Purchases System –
Receiving
Upon receipt 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.
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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.
See next slide
for flowchart
(blue symbols)
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Manual Purchases System
(contd)
Periodically Journal voucher is prepared by
Accounts Payable and sent to General
Ledger Dept. (not flowcharted)
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Manual Cash Disbursements
System
Cash Disbursements Dept.
prepares check
records information in check register (cash
disbursements journal)
forwards all documents to Treasurer for
signature. [Stop here.]
periodically sends journal voucher to
General Ledger. (not flowcharted)
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Computer-Based Systems
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Expenditure Cycle Database
Master Files
Supplier/Vendor master
file
Accounts payable master
file
Inventory master file
 Other Files
Supplier reference and
history file
Transaction Files
Purchase Order file
Open PO file
Supplier’s invoice file
Cash disbursements file
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CBIS Expenditure
Applications--Purchases
 Incorporates Data Processing function that performs many
routine accounting tasks
purchasing - computer program identifies inventory
requirements and can use one of the following methods
for authorizing and ordering inventories
system prepares POs and distributes them to
Purchasing Dept. for review/signing/distributing, OR
system distributes POs directly to vendors and
internal users, bypassing Purchasing department, OR
system uses EDI and electronically places order
with Vendor
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Computer-Based Purchases
Other tasks performed automatically by the
computer:
Updates inventory subsidiary file from the
receiving report
calculates batch totals for general ledger
update
Closes corresponding records in the open
PO file to the closed PO file
Validates voucher records against valid
vendor files
Computer-Based Cash Disbursements
Tasks performed automatically by the
computer:
system scans for vouchers currently
due
prints checks for these vouchers
records these checks in check register
batch totals are prepared for the
general ledger update procedure
Advantages of Real-Time Data Input
& Processing Over Batch
Processing
Shortens time-lag in record-keeping;
records are more current
Eliminates much of routine manual
procedures, such as transcribing
information onto paper documents
Eliminates much storage and
shuffling of paper documents
Reduces data entry errors
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Manual and
ComputerBased
CONTROLS
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Manual
Authorization Controls
Purchases of inventory should be authorized by
Inventory Control department, not by
purchasing agents or Warehouse clerks
Accounts Payable authorizes payments of bills,
not cash disbursements clerk, who writes
checks
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CBIS Authorization
Controls
 Authorizations are automated.
Programmed decision rules must be checked for
accuracy
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Example of
programmed control in
G.P. (v. 7.5): maximum
invoice amount for this
vendor.
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CBIS Authorization Controls
(continued)
Automate inventory using EDI and just-intime inventory (JIT)
Incorrect inventory model can lead to
over-purchasing or under-purchasing
Cash disbursements - automate check printing
and signing.
Programming logic must be error-free
Use automated signing below predetermined
dollar amount (depends on business rules)
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Segregation of Duties
Warehouse
Inventory control
Accounts payable
General ledger
Requisitioning
Purchases
Purchases returns and allowances
Cash disbursements
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Manual
Segregation of Functions
Custody of inventory by Warehouse must
be separate from recordkeeping for
inventory by Inventory Control Dept.
Custody of cash by Cash Disbursements
must be kept separate from
recordkeeping for cash by Accounts
Payable Dept.
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CBIS Segregation of
Functions
Computer consolidates tasks
traditionally segregated in manual
system
Computer programs authorize and
process purchase orders
Computer programs authorize and
issue checks to vendors
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Manual
Supervision
Within expenditure cycle, supervision is
of highest importance in Receiving Dept.,
where inventory arrives and is logged in
by receiving clerk. Need to minimize:
failures to properly inspect assets
theft of assets
Remember in Revenue Cycle
that supervision is most
important in Mailroom.
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CBIS Supervision
Automation often changes traditional
segregation of duties.
requires different types of supervision
Supervision takes on new aspects as technology
advances.
Electronic monitoring
Supervision becomes more difficult as workplace
becomes more sophisticated.
Employees probably have more advanced IT training
than their supervisors!
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Manual
Accounting Records
Must maintain adequate records for:
accounts payable
vouchers payable
checks
general ledger
subsidiary ledgers
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CBIS Accounting Records
 Following audit trail becomes more difficult.
 Accounting records rests on reliability and security of
magnetically stored data.
Be skeptical about accepting, on face value, accuracy
of computer-produced printouts of journals/ledgers.
 System needs to ensure that backup of all files is
continuously kept.
 Many automated systems still have many paper
documents. Good for audit trail purposes but often is
inefficient.
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Manual
Access Controls
Limit access to:
inventory
cash
accounting records
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CBIS Access Controls
Magnetic records are vulnerable to
authorized and unauthorized exposure.
Limit access to data files
Limit access to computer programs
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Manual
Independent Verification
Accounts Payable Dept. verifies most
transactions in expenditure cycle.
Purchase requisitions, purchase orders,
receiving reports, and suppliers’ invoices are
verified by Accounts Payable.
General Ledger department verifies:
total obligations recorded = total inventories
received
total reductions in accounts payable = total
cash disbursements
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CBIS Independent
Verification
Automating accounting function reduces
chances of fraud/error, & therefore the
need for manual independent verification.
However, need for verification shifts to
computer program and programmers
where fraud/error may still exist
(especially in internally developed
systems).
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