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Purchasing To Cash Disbursements

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Question:

Discuss about the Expenditure Cycle Purchasing to Cash Disbursements.
 
 

Answer:

Introduction

Expenditure Cycle may be defined as repetitive process of business activities such as purchase and payment of goods and services.  In the expenditure cycle the information that there is a need for purchase of raw materials flows from various departments such as inventory control or purchase departments and after the receipt of the material the information flows back to those sources. Similarly the expenses incurred shall flow from general ledger and reporting function for updating the same in management reports. Minimization of the expenditure of acquiring and maintaining the goods and services is its primary objective.

Expenditure Cycle Information System

For designing the accounting information system both suppliers revenue and buyers expenditure linkages are significant. Conversely it can be said that when company redesign its revenue cycle, the customer has opportunity to redesign its expenditure cycle. The process most organizations use in which a system first creates a purchase order then the same is being approved and then the inventory master file searches the appropriate supplier and then purchase order is being send to supplier via EDI , the department which is receiving the order has access to open the purchase order and verify the same.

Threats

Controls

1.      Inaccurate or invalid master file.

·         Employing Data integrity controls.

·         Restrict access to master file.

·         Proper Segregation of duties.

 

2.      Unlawful disclosure of sensitive information

·         Controls established to limit the view of sensitive information.

·         Limiting employee’s capabilities to specific information.

·         Encryption of sensitive information.

3.      Obliteration of master file.

·         Implementing disaster recovery procedures.

·          

4.      Poor performance.

·         Making managerial reports time to time.

To overcome this threat an ERP system should be established.  It consists of cases in which one is production, second is testing and development and third is backup. Its reporting capabilities will update when threat from poor performance accrues.

Ordering material, supplies and services

It is the major activity which involves identifying the what, when and how much to purchaser from a supplier. This approach is known as Economic Order Quantity (EOQ) in which an optimum order size is calculated so as to minimize the ordering carrying and stock out costs.

Where, Ordering costs -costs associated with processing of purchase transactions.

Carrying Costs – costs for holding inventory.

Stock out costs – It occurs due to shortages in inventory.

EOQ answers the question of how much to order and when to order is decided by Reorder Point. This point will be decided on the level of safety stock to meet unexpected demands and delivery time at which the stock is available. Since the EOQ method is not significantly saving costs and earning is negligible the companies have shifted to Material Requirements Planning (MRP) and Just in time System (JIT). MRP refers to accuracy in forecasting the needs of inventory so that inventory costs are reduced whereas JIT refers to minimizing the purchase and production of goods rather than forecasting the same.

Threats

Controls

1.      Inaccurate Inventory records

 

·         Adopt Perpetual Inventory Method.

·         Use of information technology.

·         Bar coding techniques to be used.

·         Use of RFID tags.

·         Periodic Inventory counts should be done.

2.      Purchasing unnecessary items.

·         Supervisors should be employed for actual demand.

Choosing suppliers

Once the purchase has been identified, the suppliers are being selected where the following factors such as price, quality of material and deliveries are to be taken care of. For authenticating the supplier purchase order is created which is an electronic document in which the supplier formally accepts buy and sell of products at predetermined prices.

Threats

Controls

1.      Inflation in prices.

 

·         Price of regular items should be stored in Data file and reviewed accordingly.

·         Designing Budgets.

2.      Low cost items may lead to inferior quality.

·         Experienced suppliers with competitive pricing.

 

Receiving

Responsibility of receiving department is to accept deliveries from suppliers. It reports to warehousing manager who is responsible for storage of goods.  The receiving report document is prepared which contains each & every details of purchase.

Threats

Controls

1.      Deliveries of unordered goods.

 

·         Accept deliveries only of items which are written in purchase order.

2.      Counting Errors.

·         Use Bar code & RFID techniques.

·         ERP system.

3.      Inventory Theft.

·         No physical access to inventory.

·         Strict Documentation.

4.      Verification of services received

·         Audit.

·         Budgetary Controls.

Approving supplier invoices

 The accounts department approves payment to the suppliers. A voucher package is considered which consists of an invoice and its supporting documents. There are 2 ways for processing supplier invoices:

  • Voucher System - An additional voucher is created called as disbursement voucher.
  • Non Voucher system – In this system as soon as the payment is done the account is marked as paid and package is removed.

Threats

Controls

1.      Mistakes in invoices.

·         Verification

·         ERS.

·         Restriction imposed

·         Proper documentation.

2.      Accounts payable wrongly credited.

·         Verification.

·         Data entry controls.

·         Reconciliation.

 

 

Cash Disbursements

The cashier is responsible for making payment to the suppliers. Segregation of duties is done.

Threats

Controls

1.      Unable to take advantages of early payment.

·         Invoices made timely.

·         Cash flow budgets are prepared.

2.      Payment made for undelivered items.

·         Verification of documents by both departments.

·         Prepare budgets.

OR

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