INTRODUCTION TO EXPENDITURES PROCESSES (STUDY OBJECTIVE 1)

In a large company, there may be thousands of purchasing transactions occurring each day. The company must have systems and processes in place to capture, record, summarize, and report these transactions. The processes are the policies and procedures that employees follow in completing the purchase of goods or materials, capturing vendor data and purchase quantities, and routing the resulting purchasing documents to the proper departments within the company. Exhibit 9-1 highlights the expenditures processes section of the overall accounting system.

When a purchase occurs, the information resulting from that purchase must flow into the purchase recording systems, the accounts payable and cash disbursement systems, and the inventory tracking systems. In IT accounting systems, these recording and processing systems are called transaction processing systems (TPS). Thus, there is a set of processes within the company to conduct purchases and route purchasing information, and there is a TPS within the IT system to record, summarize, and report these purchasing transactions.

Every company acquires materials or goods and must therefore have expenditures. It is a fundamental process of all businesses as they buy the resources needed to conduct operations, record the resulting liability, and eventually pay cash to the vendor. This process is somewhat similar to the revenue processes discussed in Chapter 8, except that goods and cash flow in opposite directions. As shown in Exhibit 9-2, goods flow away from the company in the revenue process, whereas they flow into the company in the expenditures process. Likewise, cash is collected by the company in the revenue process, whereas it is paid out in the expenditures process. Accordingly, the company is a vendor from the customer's perspective, and the company is a customer from the vendor's perspective. Accountants must always be mindful of the processing flow of the transaction in order to properly recognize it.

Exhibit 9-1 Expenditures Processes within the Overall System

There are many different kinds of resources that may be needed to run a business, such as materials, supplies, equipment, facilities, and a skilled work force, to name a few readily observable examples. Because of the large volume of expenditures transactions that most companies process and the differing nature of these transactions, this text will divide the expenditures process into two parts. Part 1 addresses purchases of materials and supplies and the related cash disbursements, sometimes known as the procurement or purchasing process. Part 2, which is presented in Chapter 10, examines special procedures related to processing payroll and purchasing property, plant, and equipment.

Exhibit 9-2 Comparison of the Revenue and Expenditures Processes

Much like the methods of earning revenue presented at the beginning of Chapter 8, there is great variety in the purchasing activities of businesses. A merchandising company, such as Banana Republic, will purchase finished merchandise that it will sell to its retail customers, whereas a manufacturing company, such as General Electric, will purchase raw materials that will be transformed into new products. Even companies in the same line of business are likely to have differences in their purchasing habits, as they may have unique characteristics in terms of product features, business practices, storage capacities, and vendor relationships.

Most companies acquire their resources on credit terms and pay for them at a later date. This chapter concentrates on purchasing and cash disbursement transactions common to a wide range of companies that acquire an inventory of goods or materials from other companies on account and sell goods or products to other companies. Not every company will carry out its expenditures processes exactly as depicted here, but this chapter provides a practical presentation of a typical approach.

The most common expenditures processes include the following:

• Prepare a purchase requisition and/or purchase order for goods or services needed.
• Notify the vendor (supplier) of goods or services needed.
• Receive goods or services, often via common carrier. A common carrier is a trucking, rail, or air freight company.
• Record the payable.
• Pay the resulting invoice.
• Update the records affected, such as accounts payable, cash, inventory, and expenses.

The first part of this chapter describes a typical purchasing system, which includes three primary categories of processes: purchasing processes, purchase return processes, and cash disbursement processes (or payments). In addition, controls and risks related to these processes are presented. For each category, the goal of the system's internal controls is to reduce the following types of business risks:

1. Invalid (fictitious or duplicate) transactions may have been recorded.
2. Transactions may have been recorded in the wrong amounts.
3. Actual transactions may have been omitted from the accounting records.
4. Transactions may have been recorded to the wrong vendor or wrong account number.
5. Transactions may not have been recorded in a timely manner.
6. Transactions may have been accumulated or transferred to the accounting records incorrectly.

This chapter also examines computer-based purchasing and cash disbursement systems. Finally, some prevalent business ethics and corporate governance topics related to the expenditures processes are presented in the latter part of the chapter.