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C H A P TER 5 The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures 223

SET UP ACCOUNTS PAYABLE. During the course of this transaction, the set up AP function has
received and temporarily filed copies of the PO and receiving report. The organization has received
inventories from the vendor and has incurred (realized) an obligation to pay for the goods.
2
At this point in the process, however, the firm has not received the supplier’s invoice containing the
financial information needed to record the transaction. The firm will thus defer recording (recognizing)
the liability until the invoice arrives. This common situation creates a slight lag (a few days) in the record-
ing process, during which time the firm’s liabilities are technically understated. As a practical matter, this
misstatement is a problem only at period-end when the firm prepares financial statements. To close the
books, the accountant will need to estimate the value of the obligation until the invoice arrives. If the esti-
mate is materially incorrect, an adjusting entry must be made to correct the error. Because the receipt of
the invoice typically triggers AP procedures, accountants need to be aware that unrecorded liabilities may
exist at period-end closing.
When the invoice arrives, the AP clerk reconciles the financial information with the receiving report
and PO in the pending file. This is called a three-way match, which verifies that what was ordered was
received and is fairly priced. Once the reconciliation is complete, the transaction is recorded in the pur-
chases journal and posted to the supplier’s account in the AP subsidiary ledger. Figure 5-7 shows the
relationship between these accounting records.
Recall that the inventory valuation method will determine how inventory control will have recorded
the receipt of inventories. If the firm is using the actual cost method, the AP clerk would send a copy of
the supplier’s invoice to inventory control. If standard costing is used, this step is not necessary.
After recording the liability, the AP clerk transfers all source documents (PO, receiving report, and
invoice) to the open AP file. Typically, this file is organized by payment due date and scanned daily to
ensure that debts are paid on the last possible date without missing due dates and losing discounts. We
examine cash disbursements procedures later in this section. Finally, the AP clerk summarizes the entries
in the purchases journal for the period (or batch) and prepares a journal voucher for the general ledger
function (see Figure 5-7). Assuming the organization uses the perpetual inventory method, the journal
entry will be:
DR CR
Inventory—Control 6,800.00
Accounts Payable—Control 6,800.00

If the periodic inventory method is used, the entry will be:

DR CR
Purchases 6,800.00
Accounts Payable—Control 6,800.00

Vouchers Payable System
Rather than using the AP procedures described in the previous section, many firms use a vouchers pay-
able system. Under this system, the AP department uses cash disbursement vouchers and maintains a
voucher register. After the AP clerk performs the three-way match, he or she prepares a cash disburse-
ment voucher to approve payment. Vouchers provide improved control over cash disbursements and
allow firms to consolidate several payments to the same supplier on a single voucher, thus reducing the
number of checks written. Figure 5-8 shows an example of a voucher.
Each voucher is recorded in the voucher register, as illustrated in Figure 5-9. The voucher register
reflects the AP liability of the firm. The sum of the unpaid vouchers in the register (those with no check
numbers and paid dates) is the firm’s total AP balance. The AP clerk files the cash disbursement voucher,
along with supporting source documents, in the vouchers payable file. This file is equivalent to the open
AP file discussed earlier and also is organized by due date. The DFD in Figure 5-1 illustrates both liabil-
ity recognition methods.

2 Note that the supplier’s invoice in the buyer’s expenditure cycle is the sales invoice of the supplier’s revenue cycle.