Question

What do we mean by the term acquisition cycle? What is the payment cycle? Describe the normal business process in the acquisition and payment cycle? What documents would a firm use to record activities in that cycle?

Answer 1

The Acquisition and Payment Cycle (also referred to as the PPP Cycle for Purchases, Payables, and Payments) is mainly comprised of two classes of transactions. The first class is the acquisition class. The typical journal entry for this class of transactions is a debit to inventory or an expense and a credit to accounts payable. The classification assertion is highly important in this scenario because there are many possible debits that can fulfill the journal entry.

The second class of transactions in the acquisition and payment cycle is the cash disbursements class. The typical journal entry for this class is simply a debit to accounts payable and a credit to cash. All in all, this cycle is mainly about incurring payables and paying off those payables with cash.

Typical Business Functions and Important Documents

At least five documents are typically used to complete the steps in the acquisition / payment process: purchase requisition, purchase order, receiving report, vendor invoice and check

Although many companies follow different internal processes and use electronic-based methods, the following flowchart is a typical business process in the acquisition and payment cycle.

The process generally starts with a purchase requisition that an employee of the company generates. The purchase requisition is a document that describes the product needed and the quantity required. The document is then sent to the purchasing department that generates a purchase order. The purchase order lists the product to purchase, the quantity to order, and the price the company is willing to pay.

Typically, employees are only permitted to buy from an approved vendor’s list. Once the ordered goods have been received by the next department, the company issues a receiving report. The report should reconcile with the purchase order and is sent to the accounts payable team in the accounting department. Here, the employee reconciles the received goods with the vendor invoice and the journal entry to accounts payable is recorded. Finally, the payment is processed in treasury and the cash is actually paid out.