Chapter 12
Acquisition/Payment Process
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Outline
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•
•
•
•
Objectives
Acquisition / payment steps
Documents
Internal controls
Information technology
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Objectives
When you finish this chapter, you should be able
to:
– Explain the role and purpose of the acquisition /
payment process
– List and discuss, in order, the steps in the process
– Identify and describe documents commonly used in
the process
– Suggest and evaluate internal controls associated
with it
– Explain the role of information technology in the
process
– Create and interpret systems documents
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Acquisition / payment steps
1. Request goods /
services based on
monitored need
2. Authorize a
purchase
4. Receive goods /
services
5. Disburse cash
6. Process purchase
returns as necessary
3. Purchase goods /
services
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Acquisition / payment steps
Inventory database
Inventory
information
Receiving information
1.0
Requisition
inventory.
vendor
Requisition
data
Purchase order
A / P database
Vendor database
2.0
Prepare purchase
order.
Payment
information
Vendor information
Purchase
information
Order information
3.0
Receive
inventory.
Authorization
information
4.0
Disburse
cash.
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Documents
• Purchase requisition
– Requests that the
purchasing
department order
goods / services
– Originates in an
operating department
– Terminates in the
purchasing
department
• Purchase order
– Specifies items
ordered, shipping
terms and other
information about the
purchase
– Originates in the
purchasing
department
– Terminates with
vendor
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Documents
• Receiving report
– Ensures that ordered
goods have been received
in good condition
– Originates in receiving
department
– Terminates in various
departments
• Vendor invoice
– Requests payment from
buying organization
– Originates with vendor
– Terminates in accounting
department of buyer
• Check
– Pays the vendor
– Originates in accounting
– Terminates with vendor
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Internal controls
• Inventory monitoring
system
• Justification for
unusual goods
• Conflict of interest
policy
• Criteria for supplier
reliability and quality
of goods
• Strategic alliances
• Document matching
– Receiving reports with
purchase orders
– Receiving reports and
purchase orders with
invoices
• Insurance and
bonding
• Internal audit
department
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Internal controls
• Separation of duties: custody,
recordkeeping, authorization
• Employee monitoring systems
• “Paid” stamps
• Information technology, such as radio
frequency identification (RFID)
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Information technology
• Online vendor payments
• Bar codes
• Vendor lists
• Inventory status checks
• Transaction recording in the AIS
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Purchase Requisition
Purchasing
1
2
PROCUREMENT CYCLE
(SUBSYSTEM)
Receiving/
Inspection
3
Cash Disbursements
5
Accounts Payable
4
Goals of the Expenditure Cycle
• The goal of providing needed resources to organization can be
broken down into several objectives:
– purchase from reliable vendors (more important than price?)
– purchase high quality items
– obtain best price possible
– purchase only items that are properly authorized
– have resources available when needed
– receive only those items ordered
– ensure items are not lost, stolen,
or broken
– pay for the items in a timely manner
A Manual Purchases System
• The purchases cycle begins in the Inventory Control
department when inventory levels drop to reorder levels
or when some other authorized person fills out a
purchase requisition.
• After all required signatures are obtained the requisition
goes to the Purchasing department.
• The Purchasing department prepares a purchase order
for each vendor and sends copies to Inventory Control,
Accounts Payable, Receiving (blind copy), and the
vendor. (Note: some companies use credit cards for
small purchases)
A Manual Purchases System
• Upon receipt of the goods, the Receiving department
counts and inspects the goods.
– One of the purposes of the blind copy of the purchase order
is to force the workers to count the goods.
• A worker then prepares the receiving report and
sends copies to the raw materials storeroom,
Purchasing, Inventory Control, and Accounts Payable.
A Manual Purchases System
• The Accounts Payable department has now received
copies of the purchase order, and receiving report.
• Upon receipt of the supplier’s invoice, Accounts
Payable reconciles all documents, posts to the purchases
journal (inventory), and records the liability in the
accounts payable subsidiary ledger.
• Periodically, the entries in the purchases journal are
summarized in a journal voucher which is sent to the
General Ledger department.
A Manual Purchases System
• The journal voucher is prepared by
Accounts Payable and sent to the General
Ledger department:
Inventory
Accts Payable
DR
CR
• Accounts Payable also prepares a cash
disbursements voucher and posts it in the
voucher register.
A Manual Purchases System
• The General Ledger department:
– posts from the accounts payable journal
voucher to the general ledger
– reconciles the inventory amount with the
account summary received from inventory
control
Manual Purchases System
Manual Cash Disbursements System
• Periodically, usually daily, Accounts
Payable searches the open vouchers
payable file for items with payments due:
– AP sends the voucher and supporting
documents to Cash Disbursements
– AP updates the accounts payable
subsidiary ledger
Manual Cash Disbursements System
• The Cash Disbursements department
– prepares the check
– records the information in a check register (cash
disbursements journal)
– Sends the check and supporting documentation to the
treasurer for signing
– sends a journal voucher to General Ledger:
Accounts Payable
DR
Cash
CR
Manual Cash Disbursements System
• Treasurer:
– Reviews the supporting documentation and
compares to the check ($ amount, vendor
details etc.)
– Hand or machine signs the check
– Mails the check directly to the vendor (never
return it to anyone in accounting)
– Stamps supporting documentation “paid” and
returns it to accounts payable
Manual Cash Disbursements System
• The General Ledger department receives:
– the journal voucher from cash disbursements
– a summary of changes to the accounts payable subsidiary
ledger from Accounts Payable
• The journal voucher is used to update the general
ledger accounts impacted (reduce cash, reduce
accounts payable)
• The change in the accounts payable control account is
reconciled to the change in the accounts payable
subsidiary ledger.
Cash Disbursements System
The Expenditure Cycle
• The time lag splits the expenditure
transaction cycle into two phases:
– physical phase (purchasing cycle)
– financial phase (cash disbursements)
Expenditure Cycle Files
• Master Files

– supplier (vendor) master file
– accounts payable master file
– merchandise inventory master
file
• Transaction and Open Document
Files
– purchase order file
• open purchase order file
– supplier’s invoice file
– open vouchers file
– cash disbursements file
Other Files
 supplier reference and
history file
 buyer file
 accounts payable detail file
The Purchase Requisition
• A need for an item starts the expenditure cycle
– based on reorder point or reorder quantity or by the action
of an authorized person
– manual: to initiate a credit purchase, someone in the
organization recognizes a need for a good or service; an
authorized person requests the good or service using a
purchase requisition form
– computerized: to initiate a credit purchase, someone in
the organization recognizes a need for a good or service;
an authorized person requests the good or service using a
terminal and a purchase requisition screen
Computer-Based Expenditure
Applications--Purchases
• Incorporates a data processing department which performs many of the
routine accounting tasks
– purchasing - a computer program identifies inventory
requirements and can use one of the following methods for
authorizing and ordering inventories
• the system prepares the POs and sends them to the
purchasing department for review, signing, and
distributing
• the system distributes the POs directly to the vendors
and internal users, bypassing the purchasing
department
• the system uses EDI and electronically places the order
Computer-Based Expenditure
Applications--Purchases
• Other tasks performed by the computer:
– updates the inventory subsidiary file from the receiving
report, calculates batch totals for the general ledger
update procedure and then closes the corresponding
records in the open PO file to the closed PO file
– a program validates the voucher records against the
valid vendor file, adds them to the voucher register, and
prepares batch totals for posting to the general ledger
Computer-Based Expenditure
Applications--Cash Disbursements
• Tasks performed by the computer:
– the system scans for vouchers currently
due
– prints checks for these vouchers
– records the disbursements in a computerbased check register (transaction file)
– batch totals are prepared for the general
ledger update procedure
Levels of Automating and
Re-Engineering Ordering
• Computer in inventory control generates a
purchase requisition and the
– purchasing department manually generates
purchase order
• Computer generates purchase order (no
P.R. needed)
– not sent until manually reviewed
• Computer-generated P.O. is automatically
sent
• EDI--no P.O.
CUSTOMER (PURCHASES CYCLE)
Internal Data Flows
EDI
External Data Flows
SELLER (REVENUE CYCLE)
External Data Flows Internal Data Flows
Purchase
Order
Customer
Order
Sales
Order
Shipping
Documents
Receiving
Report
Goods
Vendor’s
Invoice
Check
Sales
Invoice
Check
or EFT
or EFT
Advantages of Real-Time Data Input &
Processing Over Batch Processing
• Shortens the time-lag in record-keeping; hence, records
are more current
• Eliminates much of the routine manual procedures, such
as transcribing information onto paper documents
• Eliminates much of the storage and shuffling of paper
documents
• Reduces data entry correction procedures
• In cash disbursements it can result in faster payments,
discounts for prompt payment and vendor good will
Summary of Internal
Controls
General Internal Controls
• Organization controls
– segregation of duties
•
•
•
•
•
•
Documentation
Asset Accountability Controls
Management Practices
Data Center Operations Controls
Authorization Controls
Access Controls
Manual
Authorization Controls
• Purchases of inventory should be authorized by
the Inventory Control department or another
authorized person, not by purchasing agents
• Accounts Payable authorizes the payments of
bills, not the cash disbursements clerk, who
writes the checks
• How do these controls change in a ComputerBased environment?
Computer-Based
Authorization Controls
• Authorizations are automated.
– programmed decision rules must be debugged
• Automating inventory in EDI and JIT
– faulty inventory model can lead to over-purchasing or underpurchasing. Inventory assumptions must be reviewed
periodically (need for items in light of current customer orders
and future plans)
• Cash disbursements may automate check printing and signing.
– Secure control of unissued check stock and signature plate
– Some companies automate check signing only below a dollar
threshold
Segregation of Duties
•
•
•
•
•
•
•
•
Warehouse (stores)-–custody of inventory
Inventory control--inventory record keeping
Accounts payable--authorization for payment
General ledger--reviews accuracy of accounts payable and cash
disbursement clerks
Requisitioning--inventory control or authorized user
Purchasing department--only order what authorized people
request
Purchases returns and allowances
Cash disbursements-only for expenditures authorized by
accounts payable and only with proper supporting documentation
Manual
Segregation of Functions
• Custody of the asset, inventory, by the Warehouse must
be separate from recordkeeping for the assets by the
Inventory Control department
• Ability to generate checks to pay vendors by Cash
Disbursements must be kept separate from
recordkeeping for the asset by the Accounts Payable
department
Computer-Based
Segregation of Functions
• Extensive consolidation by the
computer of tasks traditionally
segregated
– computer programs authorize and process
purchase orders or EDI requests for
resupply
– computer programs authorize and issue
checks to vendors or generate electronic
fund transfers
Manual
Supervision
• Within the expenditure cycle, supervision is of
highest importance in the Receiving department,
where the inventory arrives and is logged in by a
receiving clerk. Need to minimize:
– failures to properly inspect the assets
– theft of the assets
How do these controls change in a CB environment?
Computer-Based Supervision
• Incoming Goods may be scanned
electronically by receiving (bar code
readers etc.) and an electronic receiving
report generated
• Supervision because more difficult as the
workplace becomes more sophisticated.
– employees may need to have advanced IT
training
Elimination of the Central Receiving
Function
• Many companies no longer have a central receiving
function
• Goods are send directly to the requisitioner or
requisitioning department (especially if JIT inventory
techniques used)
• Accounts payable must contract the recipient to
verify receipt before payment. Various facsimiles
accepted in place of traditional, prenumbered
receiving reports
Manual
Accounting Records
• Must maintain adequate records for:
– accounts payable
– vouchers payable
– checks
– general ledger
– subsidiary ledgers
How do these controls change in a CB environment?
Computer-Based
Accounting Records
• Maintaining an audit trail becomes more difficult.
• Accounting records rests on reliability and security of
magnetically stored data.
– Be skeptical about accepting, on face value, the accuracy
of computer produced hard-copy printouts of journals and
ledgers.
• The system needs to ensure that backup of all files is
continuously kept.
• Traditional automated systems still have a lot of paper
documents. This is good for audit trail purposes but is often
inefficient.
Manually based
Access Controls
• Access to:
– inventories (direct)
– cash (direct)
– accounting records
(indirect)
How do these controls change in a CB environment?
Computer-Based
Access Controls
• Magnetic records are vulnerable to both
authorized and unauthorized exposure
and should be protected
– System security must restrict access to
inventory and cash disbursements and to
related accounts and transaction programs
– Backup regularly and review logs for
unauthorized attempts to access the system
and for unusual transactions
Manual
Independent Verification
• The Accounts Payable department verifies much of the
work done within the expenditure cycle.
– Purchase requisitions, purchase orders, receiving reports,
and suppliers’ invoices must be checked and verified by
Accounts Payable.
• The General Ledger department verifies:
– the total obligations recorded equal the total inventories
received
– the total reductions in accounts payable equal the total
disbursements of cash
How do these controls change in a CB environment?
Computer-Based
Independent Verification
• Automating the accounting function reduces the
need for verification by reducing the chances of
fraud and error in the expenditure cycle. (Very hard
to generate a payment to a vendor unless paying for
goods received via an approved P.O)
• Fraud and error may still be present if unauthorized
users/programmers can access the system.
Common forms of fraud in the
expenditure cycle (non payroll)
• Employees ordering/purchasing
unauthorized items (company pays)
• Employees steal inventory/supplies etc.
before processed by receiving
• Employees steal inventory/supplies etc.
from storerooms and other areas
• Employees pad expense accounts
• Employees steal refunds from vendors
12-50