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Purchases and Payments Cycle - Coggle Diagram
Purchases and Payments Cycle
Characteristics
The
payments transactions of an entity
are the means by which it
pays for goods and creditors
in its ordinary business activities.
In large conglomerates, it may form part of a
shared services division
.
Instead of each store or department making separate purchases and payments, the shared services division is responsible for sourcing goods for the entire chain and making one payment for all purchases.
The
main accounts affected
in this cycle include
trade payables
other payables
goods and services consumed
provisions
general company expenses
Statement of Comprehensive Income
accruals
Statement of Financial Position
bank
cash
discount receivable
prepaid expenses
VAT
The
purchases and payments cycle
is the
process of procuring goods
and
paying for them
.
also known as
Supply Chain Management System
procurement
Main function:
1.) Ordering of Goods and Services
To order goods and services,
certain documents need to be prepared,
including
2.) List of Approved Suppliers
3.) supplier price lists
1.) Requisitions
4.) purchase orders
These documents
should be strictly controlled
and
properly processed
because they will
serve as supporting documentation for accounting journal entries
.
To manage the ordering of goods function effectively,
certain activities and controls need to be in place
, such as:
Creating a purchase requisition
when the entity reaches the re-order level
Maintaining a list of approved suppliers
and
obtaining authorization from a senior
within the department for
any changes or use of suppliers not on the list
Establishing a purchasing policy
for inventory re-ordering levels
Preparing purchase orders
with specific information, such as
description of goods
price
quantity ordered
discounts
the name of the supplier
terms of payment
delivery address.
Having a
separate purchasing department
or
buyer
Purchase orders must be
authorized by the purchase manager
and
issued in triplicate
, with
copies for
Receiving Department
Deliveries Pending Register
The Supplier
Main function:
2.) Receiving
Documentation of Activities and Controls for receiving goods
2.) Supplier delivery notes (DN)
3.) Goods received notes (GRN)
1.) Copy of purchase orders
Activities and controls for Receiving Goods
Details
of
Goods Received
Capture Details
of Goods Received
on a GRN
.
The
Individual Responsible
for Receiving should
sign off on the GRN
.
Contents
of the
Goods Received Note
The
GRN
should include:
Quantity of goods received
Purchase order number
Date of goods received
Description of goods
Details of the person who received the goods.
The GRN should be issued in duplicate format with copies sent to:
Ordering department
Accounts department along with copies of the PO and DN.
Inspection
of Goods on Receipt
Inspect goods for
type, quality,
and
quantity
against purchase orders
before signing the delivery note.
Treatment of Damaged Goods
Return
damaged goods to the supplier.
Notify the accounts and purchasing
departments accordingly.
Do not
accept damaged goods.
Main function:
3.) Recording
Documentation of Activities and Controls for Recording Goods
3.) Goods received notes (GRN)
4.) Delivery notes (DN)
2.) Purchase orders (PO’s)
5.) Purchases Journal
1.) Supplier invoice
6.) Credit Notes
(Disputed invoices and goods returned)
To properly record goods
, the following activities and controls need to be in place:
Recording of Purchases
Purchases should be
directly entered into the purchase journal
and
filed under the supplier's name
, with
regular checks to the statement received
from the supplier.
Disputed Invoices
Disputed invoices should be
kept separately and followed up by a senior staff
member.
Invoices Received:
Invoices should
only be entered into records
if they
have been approved for accuracy
by the relevant person/s.
The following should be checked:
Quality, type, quantity, and date
to the GRN and DN
The
calculations on the invoice/s
The
price, terms, and account details
to the agreed PO
Goods Returned:
All returned goods should be
sent back to the supplier,
and a
credit note
should be made out to the supplier.
Main function:
4.) Payments
Documentation of Activities and Controls for Recording Goods
3.) Bank statements
4.) Cash payments journal
2.) EFT transfer advice
1.) Remittance advices
About
The obligation to pay should be recorded when acknowledging receipt of goods
Payments to creditors/payables
consist of 3 functions:
drawing/signing of EFT's
And recording of payments
control over EFT's
After receiving goods/services, an entity has to pay the supplier
Activities and Controls
for Payments to Creditors/Payables:
Recording of payments:
Regular reconciliations
should be
done by independent persons
Individual creditor reconciliations
must be
produced monthly
for all creditor balances
Control account
should not be
accessible to accounts payable sub ledger maintainers
Recording
should be done by
independent persons
EFT's are a valid payment method
,
with controls addressed in Bank and Cash Cycle.
Risk and Control
Cycle Risks
Payments made may be
made for goods not received
, at
wrong prices, or not utilizing discounts
.
Orders may not be
or at the best prices/conditions.
timely
properly authorized
Goods received
and
recording
may
not be accurately recorded.
Control
General controls
include
segregation of duties
rotation of duties
supervision
management control
internal audit
sufficient stationery control
scrutinizing records
testing calculations.
Specific controls are implemented
in an orderly manner
to serve desired purposes
with
control objectives such a
s:
classification
cut-off
completeness
recording
authorization
accuracy
occurrence/ validity
General controls always need to be
applied before specific controls