ACCOUNTING INFORMATION SYSTEM
EXPENDITURE CYCLE
The objective of the expenditure cycle is to convert the organization’s cash into physical materials and human
resources it needs to conduct business. In this chapter, we concentrate on systems and procedures for
acquiring raw materials and finished goods from supplier.
INVOICE APPROVAL
It ensures the vendor’s invoice is legit, accurate, and matches the purchase order and receiving report
(called the three-way match)
Because of this step, it avoids paying duplicate invoice.
KEY ACTIVITIES
MONITORING - Companies track their inventory, especially finished goods. When inventory
drops to a set level (called the reorder point), the system creates a purchase requisition to
request more stock.
Usually, each item gets its own requisition. If several items are needed from the same supplier,
these requisitions are combined into one purchase order and sent to the vendor.
PO - Once purchase requisitions are received (requests for items), they are grouped by vendor,
and a purchase order (PO) is created for each vendor.
PO is sent to the vendor to order the items
A copy goes to Accounts Payable (AP) to wait for the invoice
A blind copy goes to Receiving (so they’ll check items when they arrive without knowing the
quantity expected)
Another copy is filed for record-keeping
RECEIVE GOODS - What happens when goods arrive:
The receiving clerk checks the delivery against a blind copy of the PO (a version without
quantity or price).
This forces them to physically count and inspect items, preventing laziness or fraud.
Helps catch missing, damaged, or wrong items before accepting them.
Once inspection is done, they create a Receiving Report, stating:
What was received
Item conditions
Quantities
Where the Receiving Report goes:
1 copy → With the items to the warehouse
1 copy → To Accounts Payable (AP)
1 copy → To Inventory Control (to update records)
1 copy → Filed to close out the PO
1 copy → Stored in the Receiving Report file
UPDATE INV. - After goods are received and counted, inventory records must be updated.
Two Common Methods:
1. Standard Cost System
Inventory is recorded at a fixed, predetermined cost per unit.
Only the quantity from the receiving report is needed to update the ledger.
Simple and fast.
2. Actual Cost System
Inventory is recorded based on the actual price paid to the vendor.
Needs both the receiving report (for quantity) and the supplier’s invoice (for price).
Set Up Accounts Payable
PO and Receiving Report are already on file (waiting in the AP pending file).
No entry is recorded yet – we wait for the supplier’s invoice to confirm the actual cost.
When the Invoice Arrives:
1. AP clerk performs a three-way match (PO + Receiving Report + Invoice)
o Confirms goods were ordered, received, and fairly priced.
2. If everything checks out:
o Record the liability in the Purchases Journal
o Post to the Accounts Payable Subsidiary Ledger
3. If using actual cost, a copy of the invoice is also sent to Inventory Control.
After Recording:
All documents (PO, Receiving Report, Invoice) are moved to the Open AP File, organized by due
date.
The AP clerk prepares a journal voucher to update the General Ledger.
DOCUMENTS INVOLVED
1. Purchase Order (PO)
Shows what was ordered — item, quantity, price, vendor info.
Used to check if the order was legit.
2. Receiving Report
Confirms what was actually received and its condition.
Used to verify the goods were delivered as expected.
3. Vendor Invoice
The bill from the supplier — states what they're charging.
Used to confirm pricing and trigger the actual liability entry.
AIS INTEGRATION
Computer Operations
The system checks purchase requisitions and matches them to approved vendors.
Automatically prepares and sends Purchase Orders (POs).
Adds a record to the open PO file and creates a digital PO list for the purchasing agent.
Receiving Department
This step involves real-time AIS access to verify incoming goods.
When goods arrive, the clerk enters the PO number to access a blind PO.
The system records the Receiving Report, updates inventory records, and closes the PO.
Updates both the inventory ledger and general ledger.
Accounts Payable (AP) Department
AP clerk enters the vendor invoice into the system.
The system automatically matches the invoice, PO, and receiving report (three-way match).
A virtual AP packet is generated for review.
If everything matches, the system approves payment and sets a due date.
INTERTAL CONTROLS
Transaction Authorization
Only valid transactions should be processed. When inventory hits the reorder point, inventory control
authorizes a purchase requisition to start the buying process. This ensures purchases are legit and vendors
are valid.
Supervision
Supervisors must oversee receiving clerks to ensure proper inspection and counting of goods. To prevent
cheating, supervisors should hold onto the packing slip so clerks can't just copy quantities without
actually checking the items.
Automated Three-Way Match and Payment Approval (Concise)
The system links the invoice, PO, and receiving report using the PO number. It auto-checks for
discrepancies. If the invoice is within set limits (e.g., under ₱100 or 1% price difference), it's auto-
approved for payment. Bigger mismatches are flagged for manual approval by authorized managers, who
can override the system—with full documentation.
Multilevel Security
This is a programmed technique that allows multiple individuals to simultaneously access a system, but
provides segregation of duties to limit their access privileges and activities. This technique is discussed
further in the next section.
