Question

Q:- write overview about expenditure cycle. Support your answer with DFD?

Answer 1

Meaning:

The expenditure cycle is the set of activities related to the acquisition of and payment for goods and services. These activities include the determination of what needs to be purchased, purchasing activities, the receipt of goods, and payments to suppliers.

An expenditure cycle is a set of purchasing decisions and actions. It's the repetitive process of creating purchase orders and ordering goods and services, receiving these items, approving the invoices for these items and services, and paying the invoices. Assume that your company periodically buys office supplies. Your expenditure cycle would be creating purchase orders from various employee requests for more paper, pencils and print cartridges, and calling the office supply store to place the order using the purchase order. Once the items were delivered, accounting would approve the invoice for payment and cut the check.

The three basic activities performed in the expenditure cycle are:

(1) ordering goods, supplies, and services;

(2) receiving and storing these items; and

(3) paying for these items.

the expenditure cycle should have four subsystems,

the conversion cycle should have two subsystem, and the revenue cycle should have two subsystems.

Expenditure Cycle subsystems:

1. Purchasing/Accounts Payable,

2. Cash disbursements,

3. Payroll, and

4. Fixed assets.

Processes

Many small-business owners do not have processes and systems in place to accurately track purchases. Without a purchasing system and a clearly defined expenditure cycle, you have to personally approve every purchase, every invoice and every vendor. Alternatively, if you let employees do what they want when they want, with no oversight or input, your company's expenditures could increase significantly. For example, if every time an employee needs office supplies, she stops by an office store and buys them with the company credit card or calls in her own order, you could have many duplicate purchases.

Approvals

Say you require your written approval for all new vendors. An employee completes a form explaining why the new vendor, Healthy Air, is important to the business. The form also describes the air purifiers it provides and links to the website. As the owner, you must sign the initial order because the four purifiers exceed $500 in cost and you require your signed approval for orders over $500.

Importance

It is important for your company to establish a system for its expenditure cycle. Doing so reduces fraud and the potential for fraud. Putting a system in place to standardize the ordering process from when you order to who you order from and how you pay significantly reduces the opportunity for embezzlement. If vendors must be pre-approved or approved before ordering, no employee can "pay" fake or fraudulent vendors. If you control payments, no employee can write unauthorized checks. Therefore, a written expenditure cycle strengthens your company's accounting and financial infrastructure

DATA FLOW DIAGRAM OF EXPENDITURE CYCLE

• Examines the inventory records.
• Prepares purchase requisition.
• Select supplier and prepare purchase order. supplier. Ship Goods.
• Inspection and preparation of receiving report. Purchase Department. A/P Department. ...
• Reconciliation of the three Documents Posting of data. A/P Subsidiary Account Purchase Journal. supplier.