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96 CHAPTER 4 The Procurement Process

that the vendor ships directly to a customer. Companies employ third-party
orders for trading goods, such as helmets, that they purchase and then resell
to customers without performing any operations themselves. Because the cus-
tomer receives the goods directly from the vendor, there is no goods receipt
for the company itself.
Under a subcontracting arrangement, a company sends materials to
a vendor, who uses them to create semi-fi nished products. The vendor then
sends these products back to the company that initiated the process. In this
case, the procurement process includes the additional step of shipping materi-
als to the vendor. A stock transfer is the process whereby an organization
uses the procurement process to obtain materials from another plant within
the same organization. Because the entire process takes place within a single
organization, there are no invoice and payment steps. Finally, services —
such as janitorial or landscaping services — generally do not involve receiv-
ing materials. Instead, a mechanism to record services performed – a service
sheet - is necessary.
In our example, GBI will use the standard item category to purchase the
t-shirts from Spy Gear.

Demo 4.4: Review item categories

ACCOUNT DETERMINATION
Businesses typically use the procurement process to purchase materials that
they place in inventory until they need them. For example, businesses acquire
raw materials for later use in the production process and trading goods for sub-
sequent sales to customers. Such materials are referred to as stock materials.
Recall from the discussion of fi nancial accounting in Chapter 3 that the gen-
eral ledger contains multiple inventory accounts, such as raw materials, trading
goods, and fi nished goods. How does an ERP system know which of these inven-
tory accounts must be updated when materials are received? For stock materials,
for which a material master must be defi ned, account determination — the
process whereby the system determines which general ledger accounts to use in
a given situation — is automatic and is based on data contained in the material
master, particularly the valuation class.
Companies also use the procurement process to acquire consumable
materials. As the name suggests, these are materials that are acquired to
be consumed by or used within the organization. One example of consum-
able materials is offi ce supplies, such as pencils and paper, which people in
the organization use during the course of their day-to-day work. When a
company purchases materials for consumption, the transaction must identify
the account assignment object to be charged for the purchase as well as the
general ledger accounts to be debited and credited. An account assignment
object identifi es the bearer of the cost of the purchase and is the entity for
which the materials were purchased. For example, when a company pur-
chases offi ce supplies for the marketing department, it debits a consumption
account, such as the supplies expense account in the general ledger, and it
charges the marketing department cost center for the purchase. Recall that a
cost center is a cost object used to accumulate costs for a department. In the

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