Expenditure Cycle

Expenditure Cycle

The expenditure cycle is a type of process that helps define what the purchase is from the moment a business or consumer decides a purchase of a particular good or service is necessary, to the point where the purchase is paid in full. The expenditure cycle is comprised of several distinct components, including; identifying a need, issuing a purchase order, receiving the goods, establishing a payable, and making payment for the goods. Businesses reduce the costs of running the business when they are able to complete these goals within the spending cycle. This happens because the needed material is received, at the appropriate time, price and quality, the materials arrive on time, the invoices are paid on time free of penalty, the vendors do not stop the shipment on the grounds of non-payment, and the companies can plan their labor, storage and transportation needs according to the material.

Basic Expenditure Cycle Activities

• Order materials, supplies, and services; Identify what, when, and how much to purchase and choose a supplier. Weaknesses in inventory control can create significant problems with this process. A request to purchase goods or supplies is triggered by either:

• • The inventory control function; alternate inventory control methods, three alternate approaches to inventory control:
    • Economic Order Quantity (EOQ); The EOQ refers to the ideal order quantity a company should purchase in order to minimize its inventory costs, such as holding costs, shortage costs, and order costs. EOQ provides maintaining enough stock so that production doesn’t get interrupted and the EOQ formula is also used to calculate reorder point. This system has some disadvantages; the basis of the EOQ formula assumes that consumer demand is constant, and the calculation also assumes that both ordering and holding costs remain constant. These assumptions make it difficult, if not impossible, to account for unforeseen business events in changing demand, seasonal changes in inventory costs, stock shortages, or discounts on bulk purchasing.
    • Materials Requirements Planning (MRP); The MRP is a computer-based inventory management system designed to improve productivity for businesses.
    • Just-in-Time Inventory (JIT); The JIT is a form of inventory management that requires working closely with suppliers so that purchases scheduled to begin with the aim of having the minimum amount of inventory on hand to meet demand. It also is known as lean manufacturing and sometimes referred to as the Toyota production system, is an inventory strategy.
  • An employee noticing a shortage.

Whatever the inventory control system, the order processing typically begins with a purchase requisition followed by the generation of a purchase order. The document in need of the asset or services sends a properly approved by the requisitioning department, serially numbered requisition to the purchasing department.  Prior to placing the purchase order, the purchasing department should request bids from various suppliers to make sure that the best price is obtained. And then, Pre-numbered purchase orders are used and created by the purchasing department. There should be multiple copies that will be sent to

• • • Requisitioning department
    • Vendor
    • Receiving Department
    • Accounting department

In the reviewing of Accounts Payable, the completeness and accuracy assertions are generally more relevant than the existence and rights and obligations assertions, because the risk of understatement is greater than the risk of overstatement.

• Receive materials, supplies, and services; the copy of the purchase order sent to the receiving department serves as an authorization to accept the goods and services when they arrive. A receiving report is prepared by the receiving department and forwarded to the accounting department. The receiving report is the source document used in this process: (a) It documents the date goods received, shipper, supplier, and PO number, (b) Shows item number, description, unit of measure, and quantity for each item, (c) Provides space for signature and comments by the person who received and inspected. IT can help improve the efficiency and effectiveness of the receiving activity such as Bar-Coding, RFID, EDI and satellite technology. The goods are forwarded to the requisitioning department. The two major responsibilities of the receiving department are:
  • Deciding whether to accept delivery
  • Verifying the quantity and quality of delivered goods
• Approve supplier (vendor) invoice; approval of vendor invoices is done by the accounts payable department, which reports to the controller.

Accounts Payable

Once the accounting department obtains the receiving report, it will record the payable, approve the invoice for payment, and record the payment after it is paid by the treasurer. Treasurer will get the approved voucher including requisition form, purchase order, receiving report, and invoice

• Recording payable; the receiving report is compared with the purchase order and the vendor’s invoice to confirm quantity and to prevent payment of charges for goods in excess of those ordered and received.
• Approving Invoice for payment and recording payment; When the invoice arrives, the accounting department approves it by matching the invoice, purchase order, receiving report, and (sometimes) the requisition.

Cash Disbursements

The cash disbursement cycle is the process by which a business buys items with cash resources. This process relies heavily on the decisions and approval of the accounting department of a company. The functions of approving the payment and signing the checks should be segregated. Approved voucher (invoice, purchase order, receiving report, and requisition form) prepared by the accounting department (accounts payable) are received by the treasurer, who prepares, signs and mails the checks and cancels all supporting documents after payment.