Every company, regardless of whether they manufacture and sell products or provide a service, needs resources if they are to conduct their business effectively. The expenditure cycle (EC) is a process, or rather a sequence of related processes, related to the acquisition of certain fixed assets, manufactured components or raw materials and the use of manpower, or labor, necessary to achieve the final goal, namely to sell the finished product.
The EC can therefore be described as a sequence of events leading from the decision that something is needed to ultimately paying for the required item. This sequence varies between companies, depending on the complexity and size of any given organization. In most larger companies, the EC consists of a set protocol involving a series of specific steps. A basic outline of these steps is given below.
The first step is the purchase requisition. This is a document filled in by any department as and when particular items are required. It is then passed on to the purchasing department (PD) for approval.
Once the PD has approved the requisition, a purchase order is created. Copies of this order are distributed to the relevant supplier, the department to receive the item and the accounts department (AD).
On delivery, the receiving department creates a delivery report and forwards a copy of this to the AD. The AD will then compare the purchase order, the delivery report and the invoice received from the supplier. If all amounts match, a payable is recorded, inventory is adjusted and the invoice is approved.
All documents are then sent to the treasury department in what is known as a voucher pack. The treasury then prepares and signs a check, marks all documents as paid and returns them to the AD.
