Chapter 5

The Expenditure Cycle Part 1:

Purchases and Cash
Disbursements Procedures

Principles of Accounting Information

Systems, Asia Edition
James A. Hall

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 Purchase Requisition Purchasing
1 2

PROCUREMENT CYCLE
(SUBSYSTEM)
Receiving/
Cash Disbursements Inspection
3
5

Accounts Payable
4

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 Manual Purchase System

Figure 5-12
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Goals of the Expenditure Cycle
 The 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 resources available when they are needed
 receive only those items ordered
 ensure items are not lost, stolen,
or broken
 pay for the items in a timely manner

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 A Purchase System

 Begins in Inventory Control when inventory

levels drop to reorder levels
 A purchase requisition (PR) is prepared and
copies to sent to Purchasing and Accounts
Payable (A/P)
 Purchasing prepares a purchase order (PO) for
each vendor and sends copies to Inventory
Control, A/P, and Receiving

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 A Purchase System
 Upon receipt, Receiving counts and inspects the
goods.
 A blind copy of the PO is used to force workers to
count the goods.
 A receiving report is prepared and copies sent
to the raw materials storeroom, Purchasing,
Inventory Control, and A/P.

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 A Purchases System

 A/P eventually receives copies of the PR, PO,

receiving report, and the supplier’s invoice.
 A/P reconciles these documents, posts to the
purchases journal, and records the liability in
the accounts payable subsidiary ledger.

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 A Purchase System
 A/P periodically summarizes the entries in the
purchases journal as a journal voucher which is
sent to the General Ledger (G/L) department.
Inv-Control or Purchases DR
Accts Payable-Control CR
 A/P also prepares a cash disbursements voucher
and posts it in the voucher register.

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 A Purchase System

 G/L department:
 posts from the accounts payable journal
voucher to the general ledger
 reconciles the inventory amount with the
account summary received from inventory
control

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 Cash Disbursements System

Figure 5-13

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 Cash Disbursements System

 Periodically, A/P searches the open vouchers

payable file for items with payments due:
 A/P sends the voucher and supporting
documents to Cash Disbursements
 A/P updates the accounts payable
subsidiary ledger

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 Cash Disbursements System
 Cash Disbursements:
 prepares the check
 records the information in a check register (cash
disbursements journal)
 returns paid vouchers to accounts payable, mails
the check to the supplier
 sends a journal voucher to G/L:
Accounts Payable DR
Cash CR

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 Cash Disbursements System
 G/L department receives:
 the journal voucher from cash disbursements
 a summary of the accounts payable subsidiary ledger
from A/P
 The journal voucher is used to update the
general ledger.
 The accounts payable control account is
reconciled with the subsidiary summary.

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 Authorization Controls

 Purchases of inventory should be authorized by

the Inventory Control department, not by
purchasing agents
 Accounts Payable authorizes the payments of
bills, not the cash disbursements clerk, who
writes the checks

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 Traditional Segregation of Duties

 Warehouse (stores)
 Inventory control
 Accounts payable
 General ledger
 Requisitioning
 Purchases
 Cash disbursements

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 Segregation of Functions
 Custody of the asset, inventory, by the
Warehouse must be separate from
recordkeeping for the assets by the Inventory
Control.
 Custody of the asset, cash, by Cash
Disbursements must be kept separate from
recordkeeping for the asset by A/P.

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 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

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 Accounting Records
 Must maintain adequate records for:
 accounts payable
 checks
 general ledger
 subsidiary ledgers

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 Access Controls
 Access to:
 inventories (direct)
 cash (direct)
 accounting records (indirect)

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 Independent Verification
 A/Payable dept. verifies much of the work done
within the expenditure cycle.
 PR, PO, receiving reports, and suppliers’ invoices must
be checked and verified by A/P.
 G/Ledger dept. verifies:
 the total obligations recorded equal the total inventories
received
 the total reductions in accounts payable equal the total
disbursements of cash

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