In: Accounting
Answer
The expenditure cycle is a recurring set of business activities and related information processing operations associated with the purchase of and payment for goods and services. This focuses on the acquisition of raw materials, finished goods, supplies and services.
The four basic expenditure cycle activities
Ordering materials, supplies, and services
Receiving materials, supplies, and services
Approving supplier invoices
Cash disbursements
The expenditure cycle follows a purchase from the decision to buy through the final payment. Shoppers use the expenditure cycle every time they make a purchase: They decide they need to purchase product and compare pricing and suppliers; next, they make a purchase and choose a method of payment. A company’s expenditure cycle usually has more steps and involves a number of people and departments.
Purchasing Decisions
Businesses need materials and supplies to produce goods and services. An individual requester or company agent researches products, compares pricing and determines the right product or service. In a small company, the business owner might make that decision. Some large companies have purchasing department computer systems that request material purchases as needed. The individual requester or company agent might fill out an internal purchase order for approval.
Ordering Materials
Pricing goods and services is the next step in the cycle. Terms and conditions, delivery times and return policies are other factors that affect an order. The company agent places the order with the supplier, filling out the proper paperwork or completing the order online. Companies might use a manual or computer tracking system to follow a purchase from order to final delivery.
Receiving Materials
Once the company receives the ordered materials, the purchasing agent reviews the invoices or packing slips for accuracy. He notes any discrepancies and follows company procedures for processing any product that is damaged or received in error. He documents discrepancies for credits and returns. The receiving clerk sends notification of receipt and other documentation to the accounting staff and others involved in the process.
Inventory and Storage
Once received, materials are properly inventoried. Depending on the items and need, materials could be sent immediately to the requesting agent or used in production. Excess materials could be stored on site or shipped to a warehouse. Materials must be stored and secured properly to prevent loss or deterioration.
Payment
A company completes the expenditure cycle by paying for the materials. It can pay by cash, check, credit card, bank transfers or credit line. Payments could include credits for damaged materials and incomplete orders or discounts for early payment.