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.
13-1
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.
13-2
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.
13-3
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.
13-4
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.
13-5
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.
13-6
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.
13-7
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.
13-9
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.
13-10
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.
13-11
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.
13-12
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.
13-13
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.
13-14
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.
13-15
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.
13-16
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.
13-17
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.
13-18
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.
13-19
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.
13-20
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.
13-21
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.
13-22