AEC 07 |

ACCOUNTING
INFORMATION
SYSTEM
2nd Year BS Accountancy & BS Management Accounting
University of Southern Mindanao- Kabacan

Instructor: Lady Enginee Alocelja, CPA

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 TRANSACTION CYCLES
AND BUSINESS
PROCESSES

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 TRANSACTION CYCLES AND
BUSINESS PROCESSES

EXPENDITURE
CYCLE

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Purchases and Cash Disbursements Procedures
The objective of the expenditure cycle is to convert the organization’s cash into the physical
materials and the human resources it needs to conduct business.
Payroll Processing
The procurement process into two phases:
(1) the physical phase, involving the acquisition of the resource, and
(2) the financial phase, involving the disbursement of cash.

The two major subsystems that constitute the expenditure cycle:

(1) the purchases processing subsystem and
(2) the cash disbursements subsystem

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 Purchases Processing Procedures
Purchases procedures include the tasks involved in identifying inventory needs, placing the
order, receiving the inventory, and recognizing the liability.

Purchase Purchase Receive Receiving Update Inventory Set Up Accounts

Requisition Order Goods Reports Records Payable

-a formal request for a legal document that Goods arriving from the Upon completion of the When the Supplier invoice
goods or services outlines the terms of an vendor are reconciled with physical count and arrives, the AP clerk
from an employee to agreement between a the blind copy of the PO. inspection, the receiving reconciles the financial
their organization. buyer and a seller. It's used clerk prepares a receiving information with the
to purchase products and The purpose of the blind report stating the quantity receiving report and PO in
-typically a separate services from suppliers. copy is to force the and condition of the the pending file.
purchase requisition receiving clerk to count and inventories.
will be prepared for inspect inventories prior to Once the reconciliation is
each inventory item completing the receiving complete, the transaction is
as the need is report. recorded in the purchases
recognized. journal and posted to the
supplier’s account in the AP
subsidiary ledger.

Three-way matching is an AP process that cross-checks purchase details across a trio of documents before an invoice is paid.

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DFD (Data Flow Diagram) Purchases Processing Procedures

AIS, James Hall 7e Figure 5-1

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Purchases Processing Procedures
Purchases procedures include the tasks involved in identifying inventory needs, placing the
order, receiving the inventory, and recognizing the liability.

Monitor Inventory Records - involves tracking and maintaining accurate records of all inventory items,
including quantities, locations, and movements, to ensure efficient stock management and prevent
stockouts or overstocking.

When inventories drop to a predetermined reorder point, a purchase requisition is prepared and sent to the
prepare purchase order function to initiate the purchase process.

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Purchases Processing Procedures
Purchases procedures include the tasks involved in identifying inventory needs, placing the
order, receiving the inventory, and recognizing the liability.

Prepare Purchase Order- a purchase order (PO) is prepared for each vendor.

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Purchases Processing Procedures
Purchases procedures include the tasks involved in identifying inventory needs, placing the
order, receiving the inventory, and recognizing the liability.

Receive Goods - Goods arriving from the vendor are reconciled with the blind copy of the PO.

Upon completion of the physical count and inspection, the

receiving clerk prepares a receiving report stating the quantity
and condition of the inventories.

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Purchases Processing Procedures
Purchases procedures include the tasks involved in identifying inventory needs, placing the
order, receiving the inventory, and recognizing the liability.

Update Inventory Records - Posting to a standard cost inventory ledger requires only information about the
quantities received. Because the receiving report contains quantity information, it serves this purpose.
Updating an actual cost inventory ledger requires additional financial information, such as a copy of the
supplier’s invoice when it arrives.

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 Purchases Processing Procedures

Purchases procedures include the tasks involved in identifying inventory needs, placing the
order, receiving the inventory, and recognizing the liability.

Set-Up Accounts Payable

Before Supplier Supplier invoice

Invoice received

The organization has received inventories from the vendor and the AP clerk reconciles the financial information with the
has incurred (realized) an obligation to pay for the goods. receiving report and PO in the pending file.

The firm will thus defer recording (recognizing) the liability until Once the reconciliation is complete, the transaction is
the invoice arrives. 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.

This common situation creates a slight lag (a few days) in the recording
process, during which time the firm’s liabilities are technically
understated. As a practical matter, this misstatement is a problem only
at period-end when the firm prepares financial statements. To close the
books, the accountant will need to estimate the value of the obligation
until the invoice arrives.

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Vouchers Payable System
-AP department uses cash disbursement vouchers and maintains a voucher register- where
each voucher is recorded.
-After the AP clerk performs the three-way match, he or she prepares a cash disbursement
voucher to approve payment.
-Vouchers provide improved control over cash disbursements and allow firms to consolidate
several payments to the same supplier on a single voucher, thus reducing the number of
checks written.

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Vouchers Payable System

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Purchases Processing Procedures
Purchases procedures include the tasks involved in identifying inventory needs, placing the
order, receiving the inventory, and recognizing the liability.

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 reconciles 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 purchases phase of the expenditure cycle is completed.

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 Cash Disbursements Systems
Cash Disbursements System processes the payment of obligations created in the purchases
system. The principal objective of this system is to ensure that only valid creditors receive
payment and that amounts paid are timely and correct.

- If the system makes payments early, the firm forgoes interest income that it could have earned on the funds.
- If obligations are paid late, however, the firm will lose purchase discounts or may damage its credit standing.

Identify Prepare Cash Update AP Post to General

Liabilities Due Disbursement Ledger
Record
-The cash disbursements process begins in -The general ledger function receives the
the AP department by identifying items that - The cash disbursements clerk receives -Upon receipt of the voucher packet, the
journal voucher from cash
have come due. the voucher packet and reviews the AP clerk removes the liability by debiting
disbursements and the account
documents for completeness and clerical the AP subsidiary account or by recording
summary from AP.
- Each day, the AP function reviews the open accuracy. the check number and payment date in
The voucher shows the total reductions in
AP file (or vouchers payable file) for such -For each disbursement, the clerk the voucher register. The voucher packet
the firm’s obligations and cash account
items and sends payment approval in the prepares a check and records the check is filed in the closed voucher file, and an
as a result of payments to suppliers.
form of a voucher packet (the voucher number, dollar amount, voucher number, account summary is prepared and sent
These numbers are reconciled with the
and/or supporting documents) to the cash and other pertinent data in the check to the general ledger function.
AP summary, and the AP control and
disbursements department. register, which is also called the cash cash accounts in the general ledger are
disbursements journal. updated accordingly. The approved
journal voucher is then filed.

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Manual System

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Manual System

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Computer-Based System

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Computer-Based System

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Expenditure Cycle Controls

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Expenditure Cycle Controls
Transaction Authorization - The objective of transaction authorization is to ensure that only valid
transactions are processed.

Purchase Subsystem- The inventory control function continually monitors inventory levels. As inventory levels drop to their
predetermined reorder points, inventory control formally authorizes replenishment with a purchase requisition. Formalizing
the authorization process promotes efficient inventory management and ensures the legitimacy of purchases transactions.

Cash Disbursements Subsystem - The AP function authorizes cash disbursements via the cash disbursement voucher. To
provide effective control over the flow of cash from the firm, the cash disbursements function should not write checks
without this explicit authorization. A cash disbursements journal (check register) containing the voucher number authorizing
each check provides an audit trail for verifying the authenticity of each check written.

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Expenditure Cycle Controls
Segregation of Duties - Segregating duties ensures that no single individual or department processes a
transaction in its entirety.

Inventory Control - Within the purchases subsystem, the primary physical asset is inventory. Inventory control keeps the
detailed records of the asset, while the warehouse has custody. At any point, an auditor should be able to reconcile
inventory records to the physical inventory.

General Ledger and Accounts Payable from Cash Disbursement - The asset subject to exposure in the cash disbursements
subsystem is cash. The records controlling this asset are the AP subsidiary ledger and the cash account in the general
ledger. An individual with the combined responsibilities of writing checks, posting to the cash account, and maintaining AP
could perpetrate fraud against the firm. For instance, an individual with such access could withdraw cash and then adjust
the cash account accordingly to hide the transaction. Also, he or she could establish fraudulent AP (to an associate in a
nonexistent vendor company) and then write checks to discharge the phony obligations. By segregating these functions, we
greatly reduce this type of exposure.

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Expenditure Cycle Controls
Supervision- Supervision is an internal control tool that helps organizations ensure compliance with
policies, regulations, and ethical standards.

In the expenditure cycle, the receiving department is the area that most benefits from supervision. Large quantities of
valuable assets flow through this area on their way to the warehouse. Close supervision here reduces the chances of two
types of exposure: (1) failure to properly inspect the assets and (2) the theft of assets.

Inspection of Asset - When goods arrive from the supplier, receiving clerks must inspect items for proper quantities and
condition (damage, spoilage, and so on). For this reason, the receiving clerk receives a blind copy of the original PO from
purchasing. A blind PO has all the relevant information about the goods being received except for the quantities and prices.
To obtain quantities information, which is needed for the receiving report, the receiving personnel are forced to physically
count and inspect the goods. If receiving clerks were provided with quantity information via an open PO, they may be
tempted to transfer this information to the receiving report without performing a physical count.

THEFT OF ASSETS. Receiving departments are sometimes hectic and cluttered during busy periods. In this environment,
incoming inventories are exposed to theft until they are securely placed in the warehouse. Improper inspection procedures
coupled with inadequate supervision can create a situation that is conducive to the theft of inventories in transit.

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Expenditure Cycle Controls
Accounting Records - The control objective of accounting records is to maintain an audit trail adequate for tracing a
transaction from its source document to the financial statements.

The expenditure cycle employs the following:

AP subsidiary ledger,
voucher register,
Accounting Records
check register, and
general ledger

Supporting Documents (as an attempt to intentionally misstate financial

Purchase Requisition (PR) file information. Hence, in addition to the routine accounting records, expenditure
Purchase Order (PO) file cycle systems must be designed to provide supporting information. By reviewing
these peripheral files, auditors may obtain evidence of inventory purchases that
Receiving Report File have not been recorded as liabilities. )

The auditor’s concern in the expenditure cycle is that obligations may be materially understated on financial statements
because of unrecorded transactions. This is a normal occurrence at year-end closing simply because some supplier
invoices do not arrive in time to record the liabilities.

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Expenditure Cycle Controls
Independent Verification - The objective of independent verification is to verify the accuracy and
completeness of tasks that other functions in the process perform.

The general ledger function provides an important independent verification in the system. It receives journal vouchers and
summary reports from inventory control, AP, and cash disbursements. From these sources, the general ledger function
verifies that the total obligations recorded equal the total inventories received and that the total reductions in AP equal the
total disbursements of cash.

The AP function plays a vital role in the verification of the work others in this system have done. Copies of key source documents flow into
this department for review and comparison. Each document contains unique facts about the purchase transaction, which the AP clerk must
reconcile before the firm recognizes an obligation. These include:
1. The PO, which shows that the purchasing agent ordered only the needed inventories from a valid vendor.3 This document should reconcile
with the purchase requisition.
2. The receiving report, which is evidence of the physical receipt of the goods, their condition, and the quantities received. The reconciliation
of this document with the PO signifies that the organization has a legitimate obligation.
3. The supplier’s invoice, which provides the financial information needed to record the obligation as an account payable. The AP clerk
verifies that the prices on the invoice are reasonable compared with the expected prices on the PO.

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