EXPENDITURE CYCLE I

• Expenditure cycle


  The process of converting an organization's cash into the physical materials and human resources needed to conduct business
• Expenditure cycle


  1. Purchases processing

  2. Cash disbursements
• Purchases and cash disbursements

  • Purchases involves the physical acquisition of resources, cash disbursements involves the financial payment for those resources
  • Purchases and cash disbursements are treated as independent transactions processed through separate subsystems
• Purchases processing


  1. Monitor inventory records

  2. Prepare purchase order

  3. Receive goods

  4. Update inventory records

  5. Set up accounts payable
• Purchase requisition


  Document prepared when inventory drops to a predetermined reorder point to initiate the purchase process
• Purchase order (PO)


  Document prepared for each vendor, a copy is sent to the vendor, accounts payable, receiving, and filed in the open/closed PO file
• Blind copy of PO


  Contains no quantity or price information, forces receiving clerk to count and inspect inventories before completing receiving report
• Receiving report


  Document prepared by receiving clerk stating the quantity and condition of inventories received
• Standard cost inventory ledger

  Inventory records carried at a predetermined standard value regardless of actual purchase price
• Actual cost inventory ledger


  Inventory records carried at the actual purchase price
• Set up accounts payable

  1. Reconcile PO, receiving report, and supplier invoice (3-way match)

  2. Record liability in purchases journal and AP subsidiary ledger

  3. Transfer source documents to open AP file

  4. Prepare journal voucher for general ledger
• Cash disbursements


  1. Identify liabilities due

  2. Prepare cash disbursements

  3. Authorize cash disbursements

  4. Record cash disbursements
• The cash disbursements system processes the payment of obligations created in the purchases system
• The objective of the cash disbursements system is to ensure that only valid creditors receive payment and that amounts paid are timely and correct
• Posting from journal voucher to inventory and AP control accounts

  1. Reconcile inventory control account and inventory subsidiary summary

  2. Post approved journal vouchers to journal voucher file
• With this step, the purchases phase of the expenditure cycle is completed
• Cash disbursements system


  Processes the payment of obligations created in the purchases system
• Objectives of cash disbursements system

  • Ensure only valid creditors receive payment
  • Ensure amounts paid are timely and correct
• If the system makes payments early, the firm forgoes interest income that it could have earned on the funds
• If obligations are paid late, the firm will lose purchase discounts or may damage its credit standing
• Cash disbursements process


  1. Identify liabilities due

  2. Prepare cash disbursement

  3. Update AP record

  4. Post to general ledger
• Check register


  • Shows check number, peso amount, voucher number, and other pertinent data
• Depending on the organization's materiality threshold, the check may require additional approval by the cash disbursements department manager or treasurer
• Update AP record


  1. Remove liability by debiting AP subsidiary account or recording check number and payment date in voucher register

  2. File voucher packet in closed voucher file

  3. Prepare account summary and send to general ledger
• Post to general ledger

  1. Receive journal voucher from cash disbursements and account summary from AP

  2. Reconcile total reductions in obligations and cash account

  3. Update AP control and cash accounts

  4. File approved journal voucher
• This concludes the cash disbursements procedures
• Primary internal controls in the expenditure cycle

  • Transaction authorization
  • Segregation of duties
  • Supervision
  • Accounting records
  • Access controls
  • Independent verification
• Transaction authorization in purchases subsystem


  • Inventory control function authorizes replenishment with a purchase requisition
  • Formalizing the authorization process promotes efficient inventory management and ensures legitimacy of purchases
• Transaction authorization in cash disbursements subsystem


  • AP function authorizes cash disbursements via the cash disbursement voucher
  • Cash disbursements journal (check register) provides an audit trail for verifying authenticity of each check written
• Segregation of duties


  • Segregation of inventory control from the warehouse
  • Segregation of general ledger, accounts payable, and cash disbursements
• Supervision in receiving department

  • Receiving clerks inspect items for proper quantities and condition
  • Supervisor takes custody of packing slip while receiving clerks count and inspect goods
  • Improper inspection and inadequate supervision can create situation conducive to theft of inventories in transit
• Accounting records


  • AP subsidiary ledger, voucher register, check register, and general ledger
  • Peripheral files like purchase requisition, PO, and receiving report provide supporting information for auditors
• Access controls


  • Direct access controls like locks, alarms, and restricted access to areas with inventories and cash
  • Indirect access controls like limiting access to documents that control physical assets
• Independent verification by accounts payable


  • Reconcile PO, receiving report, and supplier invoice
  • Verify prices on invoice are reasonable compared to expected prices on PO
• Independent verification by general ledger department


  • Verify total obligations recorded equal total inventories received
  • Verify total reductions in AP equal total cash disbursements
• Copies of purchase orders (4)

  • The vendor
  • Accounts Payable function (AP pending file)
  • Blind copy to the received goods function
  • Open/Closed purchase order file
• Three way match

  • Supplier's invoice
  • Receiving report
  • Purchase order

  Verifies order is received and fairly priced