Expenditure cycle

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. Much of the input to the expenditure cycle comes from the sales cycle, where purchasing requirements are driven by the volume and type of customer orders.

The expenditure cycle is comprised of several distinct components, including the requisition of goods and services, supplier selection, the ordering of goods and services, their receipt, and subsequent payment for them. The full expenditure cycle contains the following activities:

  1. Determine which goods and services need to be ordered. Most goods to be ordered are needed by the production process. To do so, the system calculates the components that need to be on hand for scheduled production and subtracts out on-hand and unallocated raw materials to arrive at the amounts that must be acquired. Alternatively, if goods or services are needed for a selling or administrative function, the user fills out a requisition form that details her requirements and forwards it to the purchasing department.

  2. When goods are being purchased for ongoing production, the system will present the purchasing staff with a preliminary purchase order, using the preferred supplier stated in the inventory master file for each item to be purchased. The purchasing staff reviews and approves these orders, which are then either sent electronically direct to suppliers, or printed and mailed to them.

  3. When non-standard goods and services are being requested, the purchasing staff investigates possible suppliers, selects the best one, and issues them a purchase order.

  4. As goods are received, the receiving department accesses open purchase orders in the system and enters the quantities received.

  5. When supplier invoices are received, they are logged into the system by the accounts payable staff. The system then compares these invoices to the authorizing purchase orders and receiving information to determine whether the invoices can be paid. There can be a significant amount of manual reconciliation work at this stage. The outcome is a set of invoices that have been approved for payment.

  6. The system schedules payments to suppliers based on the predetermined payment terms with each one. When a scheduled payment date arrives, the system processes a batch of payments, which will either be in the form of electronic funds transfers or checks.

Related Courses

Accounting Information Systems
Payables Management
Purchasing Guidebook