The expenditure or purchasing cycle is a series of business activities that involve acquiring goods and services from external vendors or suppliers. Its purpose is to complete procurement successfully, including selecting a vendor, negotiating terms and conditions, placing an order, receiving the goods or services, and making payments to the vendor.
The expenditure cycle is crucial to a company's financial management system. Proper management of this cycle can help ensure the company can acquire the goods and services it needs to operate efficiently and effectively. Effective management of the expenditure cycle involves establishing and following policies and procedures to ensure that purchases are made at the best possible price and terms, that goods and services are received promptly, and that payments are made accurately and promptly.
The expenditure cycle is a process that companies use to purchase goods and services from external vendors or suppliers. This cycle includes several steps, such as identifying the need for goods or services, selecting a vendor, negotiating terms, placing an order, receiving goods or services, and making payments. Thus, proper management of this cycle is important for a company's financial management system as it can help ensure that purchases are made at the best possible price and terms, that goods and services are received promptly, and that payments are made accurately and promptly.
Activities involved in the expenditure cycle are as below:
The flowchart of a general expenditure cycle typically starts with identifying the need for goods or services. The company then requests quotes or proposals from vendors and selects a vendor based on various factors. Next, the terms and conditions of the purchase are negotiated with the vendor.
After it's agreed, the purchase order is placed. Next, the vendor delivers the goods or services to the company. Then after the company verifies that the goods or services received match the order placed. The company then approves the invoice and records the transaction in the accounting system. Finally, the payment is made to the vendor based on the agreed payment terms.
Let us look at the examples to understand the concept better.
Suppose EatWell Restaurant is a popular eatery. It requires various supplies to run its operations, including food ingredients, cleaning supplies, and kitchen equipment. Then, the head chef identifies the need for fresh vegetables and contacts several vendors for quotes. Once the purchasing manager selects a vendor based on price, quality, and delivery time.
Next, the purchasing manager negotiates the terms and conditions of the purchase with the vendor. It includes payment terms, delivery schedules, and quality standards. After the rules are agreed upon, the purchase order is placed, and the vendor delivers the vegetables to the restaurant.
The head chef inspects the vegetables to ensure they meet the required quality standards and quantity. Upon approval, the purchasing manager approves the invoice from the vendor and records the transaction in the accounting system.
Finally, the payment is made to the vendor based on the agreed payment terms. This process is repeated for other supplies required by the restaurant to ensure smooth operations. Proper management of the expenditure cycle ensures that ABC Restaurant can acquire the necessary supplies to run its operations effectively.
BuildSolid Construction is a company that specializes in building homes and offices. The company requires various materials, tools, and equipment to complete its projects. Then the project manager identifies the need for a specific type of cement and contacts several vendors for quotes. Next, the purchasing manager selects a vendor based on price, quality, and delivery time. Next, the purchasing manager negotiates the terms and conditions of the purchase with the vendor. It includes payment terms, delivery schedules, and quality standards.
Once the terms are agreed upon, the purchase order is placed. Then the vendor delivers the cement to the construction site. Next, the project manager inspects the cement to ensure it meets the required quality standards and quantity. Thus, upon approval, the purchasing manager approves the invoice from the vendor and records the transaction in the accounting system. Finally, the payment is made to the vendor based on the agreed payment terms. So, this process is repeated for other materials, tools, and equipment the construction company requires to complete its projects.
The expenditure cycle is an important part of a company's financial management system, and proper management of this cycle can have several benefits, including:
The expenditure cycle in an accounting information system is when a company acquires goods and services from external vendors. Thus, it records the related financial transactions in the accounting system.
2. What is auditing the expenditure cycle?Auditing the expenditure cycle involves reviewing the processes and procedures involved in acquiring goods and services, ensuring compliance with policies and regulations, and verifying the accuracy and completeness of financial transactions recorded in the accounting system.
3. Name the major subsystems of the expenditure cycle?The major subsystems of the expenditure cycle include the requisition system, the purchase order system, the receiving system, the accounts payable system, and the cash disbursement system.
4. What is expenditure cycle internal controls?Internal controls for the expenditure cycle include policies and procedures for vendor selection, purchase approvals, segregation of duties, verification of goods received and invoices, and authorization and monitoring of payments.
This article has been a guide to what is Expenditure Cycle. Here, we explain it in detail with its flowchart, examples, activities, and importance. You may also find some useful articles here -
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