PURCHASING PROCESSES (STUDY OBJECTIVE 2)

The business process map in Exhibit 9-3 illustrates the flow of activities in a typical purchasing system. Exhibit 9-4 is a document flowchart depicting the related records used in a purchasing system. Exhibit 9-5 is a data flow diagram of the purchasing processes. This process begins when an employee of the company recognizes the need to make a purchase, typically as a result of observing low inventory levels or unfilled sales orders. Purchasing needs may change daily with the occurrence of shipping and receiving transactions, production transfers, and new sales orders. It may be that a warehouse attendant notices a particularly low stock level, an accountant detects potential shortages in documented inventory quantities, an operations manager becomes aware of additional quantities that will be needed to produce upcoming sales orders, or an IT system signals when an order is necessary. Regardless of the manner in which the purchase is initiated, the appropriate purchase requisition form should be prepared to document the need and request that the specific items and quantities be purchased. A purchase requisition must then be authorized by a designated member of management. The purchase requisition triggers the next steps in the purchase process.

Once a purchase requisition has been approved, it will be forwarded to the purchasing department within the company, where a purchase order form is prepared. A purchase order (PO) is a document issued to a seller by a buyer that indicates the details—products, quantities, and agreed-upon prices—for products or services that the seller will provide to the buyer. Exhibit 9-6 shows the establishment of a PO in Microsoft Dynamics^®. A designated purchasing agent will determine the vendor to whom the PO will be sent, usually by reviewing vendor records for favorable pricing, delivery, or credit terms. It may also be necessary to check the company's credit status with the chosen vendor to be sure the vendor will accept the order. If the company already has open (unpaid) purchase orders with this vendor, an additional order may cause it to exceed its credit limit. In that case, the company may need to make a prompt payment, prepay the present order, or negotiate increased credit terms.

Exhibit 9-3 Purchasing Process Map

Exhibit 9-4 Document Flowchart of the Purchasing Processes

Exhibit 9-5 Purchasing Processes Data Flow Diagram

A PO may be communicated to a vendor via telephone, in hard-copy form via fax or mail, or electronically via e-mail or directly through the computer network. In manual systems, purchasing department personnel record the transaction in a purchases journal, which is a chronological listing of all POs issued to vendors. Alternatively, software systems, such as Microsoft Dynamics^®, may automatically record the purchases.

When goods are received from the vendor, they generally are delivered via common carrier, such as a trucking or rail company. All goods received should be inspected by company personnel in the receiving area. The quantity should be counted, and the useable condition of the goods should be assessed to determine any damage or substitutions. The receiving clerk is responsible for counting and inspecting all items received and documenting the details of the receipt before the carrier leaves. The receiving clerk can help reduce the risk of error or fraud related to purchases by performing special procedures designed to determine the propriety of goods received. The purchasing department can prepare a “blind” copy of each PO. A blind purchase order includes information from the PO, but it omits data about the price and quantity of the item(s) ordered. It may also contain critical information such as quantity limits and quality specifications. With a blind PO, the receiving clerk can make sure that the receipt represents a valid PO, yet it still forces the performance of an independent check of the quantity and quality of the delivery. Even when blind copies of POs are not provided, a receiving clerk should not have access to the original POs. When receiving clerks are denied access to PO prices and quantities, it becomes nearly impossible for them to hurriedly accept a delivery without taking time to verify its accuracy.

Exhibit 9-6 Establishing a Purchase Order in Microsoft Dynamics^®

A copy of the vendor's bill of lading typically accompanies goods received from the common carrier. A bill of lading provides details of the items included in the delivery, and the receiving clerk must sign that form as verification of receipt. The vendor's packing slip may also accompany the shipment. The packing slip is intended to show quantities and descriptions of items included in the shipment, but it does not generally include prices. A receiving report is then prepared by the receiving clerk, detailing the contents and condition of the receipt. A receiving log should also be maintained as a sequential listing of all receipts. When accounting software is used to record purchasing and receiving transactions, the software maintains a receiving log and updates inventory balances. Exhibit 9-7 shows the receiving screen in Microsoft Dynamics^®.

Exhibit 9-7 Entering Purchase Receipts in Microsoft Dynamics^®

Theoretically, as soon as a company receives goods, it is obligated to pay for those goods. In practice, however, many companies wait to record the liability until the related invoice is received from the vendor. This is typically not a problem when the vendor is prompt in sending its invoice. However, there may be a lag in timing. When a receipt of goods occurs before the end of the period, but the related invoice is delayed until after the end of the period, a problem arises related to recording the liability in the correct period. This is called a cutoff issue. A cutoff is the date for the end of the accounting period. The accounts payable department should establish specific procedures to avoid cutoff issues. The liability and the inventory receipt must be recorded in the same period as the physical receipt of goods. If goods have arrived, but the related invoice is still outstanding at the end of the period, the accounts payable department should determine (or estimate) the amount owed to the vendor, in order to accrue the liability and recognize the receipt of these items in the proper period.

The accounts payable department is responsible for recording the liabilities for goods received in the accounting records. Caution must be exercised to be certain that vendor invoices represent goods that were actually ordered and received. The accounts payable department maintains copies of purchase orders and receiving reports so that the documents can be compared before the accounting records are updated. This comparison helps ensure that invoices represent goods actually ordered and received. Also, the accounts payable department will ensure that the correct vendor account is immediately adjusted for each purchase transaction so that the company will know the correct amount owed to the vendor. An accounts payable subsidiary ledger includes the detail of amounts owed to each vendor. Finally, the accounts payable department maintains a file of outstanding invoices awaiting payment. This file is usually organized in alphabetical order by vendor name. A copy of the invoice is also given to the cash disbursements department, where it is filed by due date or by the discount date, such as ten days after invoicing for 2/10, n/30 terms.

Many of the goods received are likely to be inventory items. Therefore, the inventory control department is part of the purchasing process. The inventory control department maintains inventory records, which must be increased for the proper item, quantity, and dollar amount each time a purchase occurs.

To complete the purchasing process, the general ledger function is designed for posting and reconciling transactions from the respective accounts payable and inventory subsidiary ledgers.