Purchase processing and cash disbursements procedures constitute the expenditure cycle for most retail, wholesale and manufacturing organizations.
Purchase processing procedures
Purchases procedures include the tasks involved in identifying inventory needs, placing the order, receiving the inventory and recognizing the liability. In general, these procedures apply to both manufacturing and retailing firms. It differs only in the way purchases are authorized.
| Manufacturing firms | Merchandising firms |
Purchase authorization | Production planning and control function | Inventory control function |
Monitor inventory records
The inventory control monitors and records ...view middle of the document...
Another copy is filed in the open/closed PO file to close out the PO. A third copy of the receiving report is sent to the AP department, where it is filed in the AP pending file. A fourth copy of the receiving report is sent to inventory control for updating inventory records. Finally, a copy of receiving is placed in the receiving report file.
Update inventory records
Depending on the inventory valuation method in place, the inventory control procedures may vary somewhat among firms. Organizations that use a standard cost system carry their inventories at a predetermined standard value regardless of the prior actually paid to the vendor.
Posting to a standard cost inventory ledger requires only information about the quantities received. Because the receiving report contains quantity information, it serves the purpose. Updating an actual cost inventory ledger requires additional financial information, such as a copy of the supplier’s invoice when it arrives.
Set up accounts payable
When the invoice arrives, the AP clerk reconciles the financial information with the receiving report and PO in the pending file. This is called three-way match, which verifies that what ordered was received and is fairly priced. Once the reconciliation is complete, the transaction is recorded in the purchases journal and posted to the supplier’s account in the AP subsidiary ledger.
After recording the liability, the AP clerk transfers all source documents (PO, receiving report and invoice) to the open AP file. Typically, this file is organized by payment due date and scanned daily to ensure that debts are paid on the last possible date without missing due dates and losing discounts. Finally, the AP clerk summarizes the entries in the purchases journal for the period (or batch) and prepares a journal voucher for the general ledger function.
Vouchers Payable System
Many firms use a vouchers payable system. Under this system, the AP department uses cash disbursement vouchers and maintains a voucher register. After the AP clerk performs the three-way match, he or she prepares a cash disbursements and allow firms to consolidate several payments to the same supplier on a single voucher, thus reducing the number of checks written.
Each voucher is recorded in the voucher register. It reflects the AP liability of the firm. The sum of unpaid vouchers in the register is the firm’s total AP balance. The AP clerk files the cash disbursement voucher, along with supporting source documents, in the vouchers payable file.
POST TO GENERAL LEDGER
The general ledger function receives a journal voucher from the AP department and an account summary from inventory control. The general ledger function posts from the journal voucher to the inventory and AP control accounts and reconcile the inventory control; account and the inventory subsidiary summary. The approved journal vouchers are then posted to the journal voucher file. With this step, the purchase phase of the...