Purchases and Cash Disbursements Procedures:Physical Systems

Physical Systems

In this section we examine the physical system. This begins with a review of manual procedures and then moves on to deal with several forms of computer-based systems. As mentioned in the previous chapter, manual systems are covered here as a visual training aid to promote a better understanding of the concepts presented in the previous section. From this point, therefore, the reader may continue with the review of manual systems or, without loss of technical content, bypass this material and go directly to computer- based purchases and cash disbursements applications located on page 234.

A MANUAL SYSTEM

The purpose of this section is to support the conceptual treatment of systems presented in the previous section. This should help you envision the relationships between organizational units, the segregation of duties, and the information flows essential to operations and effective internal control. In addition, we will highlight inefficiencies intrinsic to manual systems, which gave rise to improved technologies and techniques used by modern systems. The following discussion is based on Figure 5-12, which presents a flowchart of a manual purchases system.

Inventory Control

When inventories drop to a predetermined reorder point, the clerk prepares a purchase requisition. One copy of the requisition is sent to the purchasing department, and one copy is placed in the open purchase requisition file. Note that to provide proper authorization control, the inventory control department is seg- regated from the purchasing department, which executes the transaction.

Purchasing Department

The purchasing department receives the purchase requisitions, sorts them by vendor, and prepares a mul- tipart PO for each vendor. Two copies of the PO are sent to the vendor. One copy of the PO is sent to

inventory control, where the clerk files it with the open purchase requisition. One copy of the PO is sent to AP for filing in the AP pending file. One copy (the blind copy) is sent to the receiving department, where it is filed until the inventories arrive. The clerk files the last copy along with the purchase requisition in the open PO file.

Receiving

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 multipart receiving report stating the quan- tity and condition of the inventories. One copy of the receiving report accompanies the physical inventories to the storeroom. Another copy is sent to the purchasing department, where the purchasing clerk reconciles it with the open PO. The clerk closes the open PO by filing the purchase requisition, the PO, and the receiving report in the closed PO file.

A third copy of the receiving report is sent to inventory control where (assuming a standard cost system) the inventory subsidiary ledger is updated. A fourth copy of the receiving report is sent to the AP department, where it is filed in the AP pending file. The final copy of the receiving report is filed in the receiving department.

AP Department

When the invoice arrives, the AP clerk reconciles the financial information with the documents in the pending file, records the transaction in the purchases journal, and posts it to the supplier’s account in the AP subsidiary ledger (voucher register). After recording the liability, the AP clerk transfers the source documents (PO, receiving report, and invoice) to the open vouchers payable (APOK) file.

General Ledger Department

The general ledger department receives a journal voucher from the AP department and an account summary from inventory control. The general ledger clerk reconciles these and posts to the inventory and AP control accounts. With this step, the purchases phase of the expenditure cycle is completed.

THE CASH DISBURSEMENTS SYSTEMS

A detailed system flowchart of a manual cash disbursements system is presented in Figure 5-13. The tasks performed in each of the key processes are discussed in the following section.

AP Department

Each day, the AP clerk reviews the open vouchers payable (AP) file for items due and sends the vouchers and supporting documents to the cash disbursements department.

Cash Disbursements Department

The cash disbursements clerk receives the voucher packets and reviews the documents for completeness and clerical accuracy. For each disbursement, the clerk prepares a three-part check and records the check number, dollar amount, voucher number, and other pertinent data in the check register.

The check, along with the supporting documents, goes to the cash disbursements department manager, or treasurer, for his or her signature. The negotiable portion of the check is mailed to the supplier. The clerk returns the voucher packet and check copy to the AP department and files one copy of the check. Finally, the clerk summarizes the entries made to the check register and sends a journal voucher to the general ledger department.

AP Department

Upon receipt of the voucher packet, the AP clerk removes the liability by recording the check number in the voucher register and filing the voucher packet in the closed voucher file. Finally, the clerk sends an AP summary to the general ledger department.

General Ledger Department

Based on the journal voucher from cash disbursements and the account summary from AP, the general ledger clerk posts to the general ledger control accounts and files the documents. This concludes the cash disbursements procedures.

Concluding Remarks

We conclude our discussion of manual systems with two points of observation. First, notice how manual expenditure cycle systems generate a great deal of paper documentation. Buying, preparing, transporting, and filing physical documents add considerably to the cost of system operation. As we shall see in the next section, their elimination or reduction is a primary objective of computer-based systems design.

Second, for purposes of internal control, many functions such as the inventory control, purchasing, AP, cash disbursements, and the general ledger are located in physically separate departments. These labor-intensive activities also add greatly to the cost of system operation. In computer-based systems, computer programs perform these clerical tasks, which is much cheaper and far less prone to error. Although the classic department structure may still exist in computer-based environments, personnel responsibilities are refocused. Rather than being involved in day-to-day transaction processing, these departments are now involved with financial analysis and exception-based problem solving. As a result, these departments are smaller and more efficient than their manual system counterpart.