The Expenditure Cycle: Learning Objectives

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

13-2
Expenditure cycle
Deals with transactions involved in
purchasing goods and services
Custodianship of goods and materials
purchased
Cash and credit payments

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
13-4

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

13-5

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
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
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
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
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

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

13-11
Stock levels
Maintain appropriate level to facilitate
production and sales functions
Maintain a buffer of stock for emergencies

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)
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
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
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
13-16
Flowchart for purchasing function

13-17
Flowchart for purchase returns

function

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
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
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
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

13-22

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chapter

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information

Expenditure cycle business

Expenditure cycle business

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information

Expenditure cycle business

Purchase requisition used for special orders

Placing orders with suppliers

placing the order with supplier

Goods checked for quantity and quality

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information

Maintain orderly store

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information

Physical stock verification

Perpetual inventory system

Processing supplier invoices

Details of all payments are recorded in the cash

Flowchart for purchasing function

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information

Flowchart for purchase returns

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information

Internal controls for expenditure

Prenumbered purchase orders

Internal controls for expenditure

Cheque signatories have limits

Computer application systems for

Controls in the computer environment

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Accounting Information

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