Expenditure Cycle

Lesson:

The expenditure cycle focuses upon the purchase of raw materials, goods, or services from vendors and the subsequent cash disbursements to settle those liabilities.

Here are the key steps:

1. Purchase Requisition - An internal department identifies a need for goods or services and submits a formal request to the purchasing department to initiate the buying process.
2. Authorization and Vendor Selection - The requisition is reviewed and approved by management based on budgets and policies, followed by selecting a vendor through quotes or competitive bidding to ensure cost-effectiveness and compliance.
3. Purchase Order (PO) - An authorized purchase order (PO) is prepared and sent to the selected vendor, specifying terms, prices, delivery dates, and quantities, which serves as a legal commitment and control document.
4. Receiving Goods or Services - Goods are received or services are performed and inspected for quality and quantity, with a receiving report generated to document acceptance and any discrepancies for accurate inventory or asset recording.
5. Invoice Verification / Accounts Payable Vouching - The vendor's invoice is compared to the PO and receiving report in a three-way match to verify accuracy, amounts, and compliance with terms, identifying any errors or disputes before payment.
6. Payment Approval and Disbursement - The verified invoice is approved for payment, and cash is disbursed via check, electronic transfer, or other methods, applying any discounts for early payment to optimize cash flow.
7. Recording and Reconciliation - The transaction is journalized in the accounting system (e.g., debiting expenses or assets and crediting accounts payable), followed by reconciling accounts and monitoring for ongoing obligations like accruals.

Answer:

Explanation:

The vendor's invoice is compared to the PO and receiving report in a three-way match to verify accuracy, amounts, and compliance with terms, identifying any errors or disputes before payment.