WEEK 7:

Expenditure
Cycle-Purchase
System

Learning Objectives
1. Explain the major activities and operations
contained within the purchase expenditure
cycle
2. Examine

the

key

internal

control

requirements, potential risks of a purchase

expenditure cycle
3. Explain

the

impact

communication
innovations
cycle.

on

the

of

information

and

technology

enabled

purchase

expenditure
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Learning Outcomes
1. Describe the major activities and operations
contained within the corporate expenditure
cycle
2. Explain the key decision stages within the
corporate expenditure cycle
3. Demonstrate an understanding of the key
internal control requirements of a corporate
expenditure cycle

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Learning Outcomes
4. Demonstrate an understanding of the potential
risks and threats associated with inappropriate
internal control
5. Consider and explain the impact of information
and

communication

innovations

on

the

technology
corporate

enabled

expenditure

cycle.

SEGi University & Colleges. All rights reserved.

Expenditure
Cycle Concepts

Introduction
The expenditure cycle involves the outflow of
cash and provides the

opposite to the

revenue cycle.
Expenditure cycles are similar for all types of
organisations.
The main subsystems include:
The purchases processing system
The cash payments processing system

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Objectives of the Cycle

To ensure that all goods and services are
ordered as needed.
To receive all ordered goods and verify that
they are in good condition.
To safeguard goods until needed.
To ensure that invoices pertaining to goods
and services are valid and correct.

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Objectives of the Cycle

To

record

and

classify

the

expenditures

promptly and accurately.

To post obligations and cash disbursements to
proper suppliers accounts in the accounts
payable ledger.
To ensure that all cash disbursements are
related to authorized expenditures.
To record and classify cash disbursements
promptly and accurately.
SEGi University & Colleges. All rights reserved.

Expenditure
Cycle Data
Flow Diagram

Expenditure cycle Purchase Order Entry

Supplier

Orders

1.1
Place order

Supplier

Orders
1.2
Receive
Goods

Purchase Order

Authorisation
1.4
Pay invoice

DFD for
Purchase order entry

Stock

1.3
Record
invoice
Invoice

Payments

Supplier

Source: Boczko, T. 2007

SEGi University & Colleges. All rights reserved.

Cash Disbursements Processing System

Processing Petty Cash disbursements
Imprest System
Disbursing cash for miscellaneous purposes

SEGi University & Colleges. All rights reserved.

Cash Disbursements Processing System

Processing Petty Cash disbursements
Imprest System
Disbursing cash for miscellaneous purposes

SEGi University & Colleges. All rights reserved.

Expenditure
Cycle
Managerial
Purchase
Decisions

Managerial Decisions
Inventory (Stock)
What levels of inventory should be stocked?
When

should

particular

inventory

be

reordered?
What quantities of particular inventory items
should be reordered?
When should long term purchase contracts be
obtained for particular inventory items?

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Managerial Decisions
Which suppliers should be established as longterm sources of merchandise and supplies?
From

which

suppliers

should

particular

inventory items be ordered?

What

procedures

should

be

followed

in

receiving and storing merchandise inventory?

What organizational units are to be included in
the

inventory

management

and

logistics

function?
SEGi University & Colleges. All rights reserved.

Expenditure
Cycle Risks

Risk Exposures within the Expenditure Cycle

The key risks are that-
Goods are ordered incorrectly or charged
incorrectly.
They are purchased without authorisation or
invoices are processed fraudulently.
Assets are stolen by a range of means.

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Expenditure
Cycle Controls

General Controls
Organizational Controls
Documentation Controls
Asset Accountability Controls
Management Practices Controls
Training & Bonding of employees
Systems development & changes subject to prior
approvals, testing, and sign-of
Audits on purchases and cash disbursements
Periodic review and analyses of account activity and
computer-approved transactions

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Access Controls
Assigned

passwords

required

in

order

to

access accounts payable and other supplierrelated files

Terminals restricted in their functions with
respect to purchases and cash disbursement
transactions
Logging

of

all

purchases

and

cash

disbursement transactions upon their entry

into the system
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Input Controls
Prepare

pre-numbered

and

well-designed

documents relating to purchases, receiving,

payables, and cash disbursements.
Validate data on purchase orders and invoices.
Correct errors.

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Processing Controls
Only allow valid authorisations
Verify all data elements and computations on
purchase requisitions and on purchase orders
Vouch all data elements and computations on
suppliers invoices (match to order
Monitor all open transactions, such as partial
deliveries and rejected goods

SEGi University & Colleges. All rights reserved.

Output Controls
Clear processing procedures
Establish budgetary control over purchases, with
periodic reviews of actual purchase costs and
such key factors as inventory turnover rates
Compare monthly statements from suppliers with
the balances appearing in the suppliers accounts
in accounts payable.
Store documents appropriately by number
Maintain a clear audit trail

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References

Dull, R. B. , Gelinas, U. J. and Wheeler, P. R. (2012),

Accounting

Information

Systems

Foundations

in

Enterprise Risk Management, 9th Edition, South-Western,

Cengage Learning.

Hall, J. (2015), Accounting Information Systems, 9th

Edition, Cengage Learning.

Brodnar, G. H. and Hopwood, W. S. (2006), Accounting

Information Systems, Ninth Edition, Pearson Prentice
Hall.

Bagranof, Simkin, Strand (2010), Core Concepts of

Accounting Information Systems, 11th Edition, John Wiley

Curtis, G. and Cobham, D. (2008) Business Information

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Systems: Analysis, Design and Practice, Financial Times/

References
Stair,

R.,

Reynolds,

Fundamentals

of

R.

and

Business

Chesney,
Information

T.

(2008)

Systems,

Cengage
Hall, J.A., (2011) & (2007), Accounting Information
Systems, 5th & 7th Edition, International Student
Edition, Thomson South-Western, US.
Romney,

M.

&

Steinbart,

P.

(2006)

Accounting

Information Systems, Upper Saddle River, New Jersey,

Pearson Education.
Boczko, T. (2007), Corporate Accounting Information
Systems, Financial Times/Prentice Hall
SEGi University & Colleges. All rights reserved.