The acquisition and expenditure cycle involves the processes a company uses to purchase goods and services, receive them, record the related assets or expenses and liabilities, and pay vendors. This cycle impacts numerous general ledger accounts, such as accounts payable, expenses, and long-term assets. The basic activities include:
The cycle begins when a department identifies a need for supplies, materials, equipment, or services and submits a purchase requisition to the purchasing department. This document typically includes the requesting department’s name, a list of items, an account number for cost allocation, and an authorized signature.
The purchasing department reviews the requisition and issues a purchase order to an approved vendor from the approved vendor list, which ensures vendors meet standards for pricing, quality, and delivery. The purchase order formalizes the purchase authorization.
For large purchases, a bidding process may be required to secure competitive terms, and controls are in place to prevent fraud, such as kickbacks or fictitious vendors.
Upon delivery, goods are accompanied by a bill of lading, which includes the purchase order number and shipping details, matched to the purchase order to verify the shipment.
The receiving department inspects the goods for quantity and quality and prepares a receiving report, often using a "blind" purchase order (lacking quantity details) to ensure an independent count. For services, an invoice or similar form signed by a responsible person verifies completion.
Accounts payable are recorded when goods or services are received, using a voucher package that combines the purchase order, vendor’s invoice, and receiving report. The voucher details the accounts to be debited and includes verification of dates, prices, and quantities.
Entries are then made to debit inventory, fixed assets, or expense accounts and credit accounts payable.
This step, covered in Chapter 6, involves cash disbursements, but it completes the cycle by settling the recorded liabilities.
Purchase Requisition: Initiates the process, detailing the items needed and authorization.
Purchase Order: Formalizes the order to the vendor, often linked to an approved vendor list.
Bill of Lading: Accompanies delivered goods, providing shipping and purchase order details.
Receiving Report: Documents the receipt and inspection of goods, ensuring accuracy.
Vendor’s Invoice: Submitted by the vendor, detailing the cost of goods or services.
Voucher: Combines purchase order, receiving report, and invoice for payment approval and accounting entry.