EXPENDITURE

CYCLE
 ▪ The goal of providing needed resources

Goals of to the organization can be broken down

into several objectives:
the ▪
▪
purchase from reliable vendors
purchase high-quality items
Expenditure ▪ Obtain the best possible price
▪ purchase only items that are properly
Cycle 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
 BEGINS IN INVENTORY CONTROL WHEN
INVENTORY LEVELS DROP TO REORDER
A LEVELS
Purchase A PURCHASE REQUISITION (PR) IS

System PREPARED AND COPIES TO BE SENT TO

PURCHASING AND ACCOUNTS PAYABLE
(A/P)

PURCHASING PREPARES A PURCHASE

ORDER (PO) FOR EACH VENDOR AND
SENDS COPIES TO INVENTORY CONTROL,
AP, AND RECEIVING
 UPON RECEIPT, RECEIVING COUNTS
A AND INSPECTS THE GOODS.
o A BLIND COPY OF THE PO IS USED
Purchase TO FORCE WORKERS TO COUNT

System THE GOODS.

A RECEIVING REPORT IS PREPARED

AND COPIES SENT TO THE RAW
MATERIALS STOREROOM,
PURCHASING, INVENTORY CONTROL,
AND AP.
 A/P EVENTUALLY RECEIVES COPIES
A OF THE PR, PO, RECEIVING REPORT,
AND THE SUPPLIER’S INVOICE.
Purchase
System A/P RECONCILES THESE DOCUMENTS,
POSTS TO THE PURCHASES JOURNAL,
AND RECORDS THE LIABILITY IN THE
ACCOUNTS PAYABLE SUBSIDIARY
LEDGER.
 A/P PERIODICALLY SUMMARIZES THE
A ENTRIES IN THE PURCHASES JOURNAL
AS A JOURNAL VOUCHER WHICH IS
Purchase SENT TO THE GENERAL LEDGER (G/L)

System DEPARTMENT.
o Inventory Control or Purchases DR
o Accounts Payable – Control CR

A/P ALSO PREPARES A CASH

DISBURSEMENTS VOUCHER AND
POSTS IT IN THE VOUCHER
REGISTER.
 GL DEPARTMENT
A o posts from the accounts payable
journal voucher to the general
Purchase ledger
o reconciles the inventory amount
System with the account summary
received from the inventory
control
 ▪ 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
Cash ▪ A/P updates the accounts

Disbursement payable subsidiary ledger

System
Cash Disbursement
System
CASH DISBURSEMENT
▪ Prepares the check
▪ Records the information in a check register (cash
disbursement journal)
▪ Returns paid vouchers to accounts payable and mails the
check to the supplier.
▪ Sends a journal voucher to GL: AP (dr) ; Cash (cr)
Cash Disbursement
System
CASH DISBURSEMENT
▪ 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.
When is the best time to pay the
payable?
Computer-Based
Accounting System

▪ CBAS technology can be viewed as a continuum with two

extremes:
▪ automation - use technology to improve efficiency and
effectiveness
▪ reengineering – use technology to restructure business
processes and firm organization
Levels of Automating and
Reengineering Ordering
▪ Computer generates PR
▪ Purchases manually generates PO
▪ Computer generates PO (no PR needed)
▪ PO not sent until manually reviewed
▪ Computer-generated PO is automatically sent without
manual review
▪ Electronic Data Interchange (EDI)
▪ Computer-to-computer communication without PO
 Expenditure Cycle
Database
▪ Master Files ▪ Transaction and Open ▪ Other Files
▪ supplier Document Files ▪ supplier
(vendor) master ▪ purchase order file reference and
file ▪ open purchase history file
▪ accounts order file ▪ buyer file
payable master ▪ supplier’s invoice ▪ accounts
file file payable detail
▪ merchandise ▪ open vouchers file file
inventory ▪ cash
master file disbursements file
Computer-Based
Purchases
▪ A Data Processing dept. performs routine accounting tasks.
▪ Purchasing - a computer program identifies inventory
requirements
▪ The following methods are used for authorizing and ordering
inventories:
▪ the system prepares POs and sends them to Purchases for
review, signing, and distributing
▪ the system distributes POs directly to the vendors and
internal users, bypassing Purchases
▪ the system uses electronic data interchange (EDI) and
electronically places the order without POs
Computer-Based
Purchases
▪ Other tasks performed automatically by the computer:
▪ updates the inventory subsidiary file from the receiving
report
▪ calculates batch totals for general ledger update
▪ closes the corresponding records in the open PO file to the
closed PO file
▪ validates the voucher records against valid vendor files
Computer-Based
Purchases
▪ Tasks performed automatically by the computer:
▪ the system scans for vouchers currently due
▪ prints checks for these vouchers
▪ records these checks in the check register
▪ batch totals are prepared for the general ledger update
procedure
Advantages of Real-Time
Data Input & Processing
Over Batch Processing
▪ Shortens the time-lag in record-keeping; hence, records are
more current
▪ Eliminates much of the routine manual procedures, such as
transcribing information onto paper documents
▪ Eliminates much of the storage and shuffling of paper
documents
▪ Reduces data entry correction procedures
General Internal
Controls
▪ Organization controls
▪ Segregation of duties
▪ Documentation
▪ Asset Accountability Controls
▪ Management Practices
▪ Data Center Operations Controls
▪ Authorization Controls
▪ Access Controls
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
How do these controls change in a CBAS?
Computer-Based
Authorization Controls
▪ Authorizations are automated.
▪ programmed decision rules must be debugged
▪ Automating inventory in EDI and JIT
▪ faulty inventory model can lead to over-purchasing or
under-purchasing
▪ Cash disbursements may automate check printing and
signing.
▪ programming logic must be flawless
▪ automated signing only below a peso threshold
Traditional Segregation
of Duties
▪ Warehouse (stores)
▪ Inventory control
▪ Accounts payable
▪ General ledger
▪ Requisitioning
▪ Purchases
▪ Purchases returns and allowances
▪ Cash disbursements
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.
How do these controls change in a CBAS?
Computer-Based
Segregation of Functions
▪ Extensive consolidation by the computer of tasks
traditionally segregated
▪ computer programs authorize and process purchase
orders
▪ computer programs authorize and issue checks to
vendors
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
How do these controls change in a CBAS?
Computer-Based
Supervision
▪ Automation often leads to a collapsing of the traditional
segregation of duties.
▪ requires greater supervision
▪ Supervision takes on new aspects as technology advances.
▪ electronic monitoring
▪ Supervision because more difficult as the workplace
becomes more sophisticated.
▪ employees may have advanced IT training
Accounting Records
▪ Must maintain adequate records for:
▪ accounts payable
▪ vouchers payable
▪ checks
▪ general ledger
▪ subsidiary ledgers
How do these controls change in a CBAS?
Computer-Based
Accounting Records
▪ Accounting records rest on the reliability and security of
stored digitalized data.
▪ Accountants should be skeptical about the accuracy of
hard-copy printouts.
▪ Backups - the system needs to ensure that backups of all
files are continuously kept
▪ Most automated systems still have a lot of paper documents.
▪ This is good for audit trail purposes but is often inefficient.
▪ As the system becomes increasing paperless, maintaining
an audit trail becomes more difficult.
Access Controls
▪ Access to:
▪ inventories (direct)
▪ cash (direct)
▪ accounting records (indirect)

How do these controls change in a CBAS?

Computer-Based
Access Controls
▪ Magnetic records are vulnerable to both authorized and
unauthorized exposure and should be protected
▪ must have limited file accessibility
▪ programs must be safeguarded and monitored
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
How do these controls change in a CBAS?
Computer-Based
Independent Verification
▪ Automating the accounting function reduces the need
for verification by reducing the chances of fraud and
error in the expenditure cycle.
▪ However, the need for verification shifts to the
computer program and the programmers where fraud
and error may still be present.
Payroll System

▪ Personnel department uses personnel action forms

to:
▪ activate new employees
▪ change the pay rate of employees
▪ change marital status and/or number of
dependents
▪ terminate employees
Payroll System

▪ Production employees fill out two forms:

▪ job tickets - account for the time spent by the
worker on each production job
▪ time cards - used to capture the total time
worked each pay period for payroll calculations
▪ must be signed by a supervisor
Payroll System

▪ Cost Accounting department:

▪ uses the job tickets to allocate labor costs to WIP
accounts
▪ summarizes these charges in a labor distribution
summary which is forwarded to G/L department
▪ Payroll department receives personnel action forms
and time cards.
Payroll System

▪ Action forms and time cards are used to:

▪ prepare the payroll register
▪ enter the information into the employee payroll
records
▪ prepare paychecks
▪ send paychecks to Cash Disbursements and a copy
of the payroll register to Accounts Payable
Payroll System
▪ Accounts Payable department:
▪ prepares a cash disbursements voucher or
payroll voucher for the total amount of the payroll
▪ sends copies to the Cash Disbursements and G/L
departments
Payroll System
▪ Cash Disbursements department:
▪ reviews and signs the paychecks and forwards
them to a paymaster for distribution to the
employees
▪ writes a check for the payroll and deposits it into
the payroll imprest account
Payroll System
▪ G/L dept. makes the following journal entries:
▪ From the Labor Distribution Summary
WIP (Direct Labor) DR
Factory Overhead (Indirect Labor) DR
Wages Payable CR
▪ From the Distribution Voucher
Wages Payable DR
Cash CR
Fed. Inc. Tax Withholding Payable CR
State Inc. Tax Withholding Payable CR
FICA Withholding Payable CR
Other Withholding Payables CR
Payroll System
▪ G/L department makes a journal entry to
transfer the cash from the operating bank
account to the payroll imprest account:
Cash - Payroll Imprest Account DR
Cash - Operating Account CR
Payroll Controls

▪ Transaction authorization - the personnel

action form helps prevent:
▪ terminated employees from receiving checks
▪ wage rates from being improperly changed
for current employees
Payroll Controls

▪ Segregation of Duties - timekeeping and

personnel functions should be separated
▪ Supervision - need to monitor employees to
ensure they are not “clocking in” for one
another
Payroll Controls
▪ Accounting Records - audit trail includes:
▪ time cards
▪ job ticket – total amount of time that an individual
spent on each production job
▪ disbursement vouchers
▪ labor distribution summary – total amt spent on a
production job
▪ payroll register
▪ subsidiary ledger accounts
▪ general ledger accounts
Payroll Controls

▪ Access Controls - need to prevent employees

from having improper access to:
▪ accounting records, such as time cards
which can be altered
▪ unsigned checks
Payroll Controls
▪ Independent Verification:
▪ verification of time cards (accuracy)
▪ distribution of paychecks to authorized
employees
▪ verification of the accuracy of payroll register by
A/P dept.
▪ G/L dept. reconciles the labor distribution
summary and the payroll disbursement
voucher
Computer-Based Payroll
Systems
▪ Payroll is well-suited to batch processing and
sequential files.
▪ Most employees on the master file receive
paychecks periodically.
▪ The computer program performs detailed record-
keeping, check-writing, and general ledger functions.
Reengineered HRM
Systems
▪ Payroll can be re-engineered as a part of human resource
management (HRM).
▪ IT can process a wide range of personnel-related data,
including:
▪ employee benefits
▪ labor resource planning
▪ employee skills and training
▪ pay rates, deductions, and paychecks
▪ evaluations
Key Features of
Reengineered HRM
▪ Personnel - can make changes to the employee file in
real time
▪ Cost Accounting - enters job cost data either daily or
in real-time
▪ Timekeeping - enters the attendance file daily
▪ Data Processing - still uses batch processing and
prepares all reports, checks, and updates the general
ledger
Reengineered HRM
Systems…
differ from automated manual and batch/sequential file
systems because:
▪ operations depts. transmit transactions to data
processing via terminals
▪ direct access files are used for storage
▪ many processes are performed real-time
▪ real-time access to personnel files required for
direct inquiries
The Fixed Asset System
(FAS)
▪ Fixed Assets - property, plant, and equipment
used in the operation of a business
Life of a Fixed Asset
Objectives of FAS
▪ Acquire fixed assets in accordance with management
approval and procedures
▪ Maintain adequate accounting records of asset
acquisition, cost, description, and location
▪ Maintain depreciation records for depreciable assets in
accordance with an acceptable method
▪ Provide management with information to help it plan
future fixed-asset investments
▪ Properly record the retirement and disposal of fixed
assets
Asset Acquisition

▪ Begins when a dept. the manager determines that an

old fixed asset needs to be replaced or that a new fixed
asset is warranted
▪ A purchase requisition is filled out.
▪ May require an authorizing signature for items over
a pre-specified limit
▪ FAS dept. performs record-keeping functions.
Asset Maintenance

▪ Involves adjusting FAS subsidiary account balances as

assets depreciate – recording of periodic depreciation
▪ Depreciation calculations are internal transactions that
the FAS system bases upon a depreciation schedule.
▪ Physical improvements must also be recorded to
increase the subsidiary account balance and
depreciation schedule.
▪ Keeping track of the physical location of the assets
Asset Disposal

▪ At the end of an asset’s useful life (or earlier

disposition), the asset must be removed from
the records and depreciation schedule
▪ Disposals require disposal request forms and
disposal reports as source documents.
Computer-Based Fixed
Asset System—Acquisition

▪ Receipts of assets are digitally recorded in the

system, along with information such as their
useful life, depreciation methods, etc.
▪ Ledgers are automatically updated
Computer-Based Fixed
Asset System—Maintenance
▪ Computerized FAS automatically:
▪ calculate the current period’s depreciation
▪ update accumulated depreciation and book-value
fields in the subsidiary records
▪ post total depreciation to the affected general
ledger accounts
▪ record depreciation transactions by adding
records to the journal voucher file
Computer-Based Fixed
Asset System—Disposal
▪ Computerized FAS automatically:
▪ post adjusting entries to the fixed asset control
account in the general ledger
▪ record losses or gains associated with the disposal
transaction
▪ prepare journal voucher records
FAS Controls

▪ Authorization - should be formal and explicit

because of the high cost of FAS:
▪ acquisitions
▪ changes in depreciation methods
▪ Supervision – the threat of misappropriation
requires constant management oversight:
▪ theft - secure physical locations of assets
▪ misuse - monitor on-the-job activities
FAS Controls

▪ Independent Verification - internal auditors should

periodically verify FAS records:
▪ the reasonableness of factors used in decisions
(useful life, discounts, capital budgeting model)
▪ location, condition, and fair value of the fixed
asset records in the subsidiary ledger
▪ the programming logic for automatic calculations
(depreciation)