There are four basic steps in the cash disbursements process

(the following steps are focused on expenditures for goods or services – the most common reason for disbursing cash)

1.Identify a need to purchase materials, supplies, or services

2.Receive the materials, supplies, or services

3.Approve the vendor invoice

4.Disburse cash to the vendor

Every company is different, but there are 4 basic steps in the process

Take out your hand out and use it to follow along for the next few slides, as we go through the process in detail.

Step 1: Identify a need to purchase materials, supplies, or services

The company identifies what, when, how much to purchase of a good or a service

An employee of the company fills out a purchase requisition

Purchase requisition: 

Paper document or electronic form that identifies:

Which employee is requesting the goods or services

The date they are needed

Where the goods are to be delivered (if necessary)

Description, quantities and prices of the goods or services

Name of the vendor

Approval from the department head

Cash disbursements process – purchase requisition

You will need to ensure the requisition form is complete and most importantly signed and approved by the right person.

Let’s look at an example together. Every company will have different templates, but usually contain similar information,

QS: What fields do you see, what do you observe?

As we noted, the first step in the process is the filing out of the top portion. This is done by the team who will be spending the money. For example, the marketing associate would include a request to purchase banners for an event. His/her superior would approve. Then the associate can go out and engage the appropriate vendor.

Step 1: Identify a need to purchase materials, supplies, or services

The company identifies what, when, how much to purchase of a good or a service

An employee of the company fills out a purchase requisition

Some companies have procurement policies, which are rules on how certain purchases are made

Coming back to our process

Go through bullet 3, then next slide has details

Procurement policy: 

A policy that creates rules and guidelines for purchasing goods and services from suppliers. It generally contains information on:

Employees who have the authority to purchase for the company

Spending limits for employees who have authority to purchase

Criteria for selecting vendors

Listing of preferred vendors

You need to be aware of your company’s procurement policy and ensure that expenditures coming to you through the purchase requisitions abide by the policy.

Step 1: Identify a need to purchase materials, supplies, or services

The company identifies what, when, how much to purchase of a good or a service

An employee of the company fills out a purchase requisition

Some companies have procurement policies, which are rules on how certain purchases are made

Once a vendor is identified, a purchase order is provided to the vendor (only occurs for certain types of purchases such as inventory)

Purchase order (PO): 

A document that requests a vendor/supplier to sell and deliver goods or services. It generally contains:

Name of the vendor

Quantity and price of units required

Requested delivery date and shipping information

Once a company issues a PO to a vendor, it is a promise to pay for the delivery of the requested goods or services.

Qs: After the PO is issued, do we now have a liability?

Qs: What are our criteria for a liability?

1.Presently owed

2.Resulting from past events

3.Will result in outflow of resources

In this case, the cash is not presently owed. It will be owed once the company provides us with the goods or services, so no liability exists at this point.

PO

Step 2: Receive the materials, supplies, or services

Once the vendor delivers the goods, the employee receiving the goods has two major responsibilities

Verifying that the quantity and quality of goods delivered agrees to the purchase order

Accepting the delivery, typically with a sign-off

The employee will fill out a receiving report, which shows the amounts received and is signed by the employee receiving

For the delivery of services, this step is not as important but the company will want to ensure that the quality of the service was as promised

Go through bullet 2, adding:

Not just the quantity, but also look at the quality of the goods. Are they as promised? If a good is damaged, the company will not want to pay for it.

Go through bullet 3, adding:

That document is evidence that the goods were received, the quantity of goods received and quality of the goods received.

Go through bullet 4

Step 3: Approve the vendor invoice

The vendor invoice is received by either the purchaser or the accounting department

The accounting department must approve the invoice

The accounting department compares vendor invoice to  purchase requisition, purchase order and receiving report

If there is no purchase order or receiving report, the accounting department must confirm that it is a valid invoice

Qs: If you were the accounting department, what would you do if the quantity and price on the invoice is different than the purchase order or receiving report?

Step 4: Cash is disbursed to the vendor

Cash payments are made by the accounting department

Payments are only made when all supporting documentation is reconciled: approved purchase requisition, vendor invoice, purchase order, and receiving report

Payments must be approved by employees who have authorization

As a junior accountant, you’ll often be responsible for drafting cheques or transfers, after you have reviewed all documentation and it is complete and accurate.

The payments will be reviewed and approved by your manager.

Diagram

The process we just described is typically performed for large purchases, such as inventory or fixed assets

For many organizations, the majority of cash disbursements are for small amounts

Would you issue a purchase order when you take a moto or you purchase cleaning supplies at a shop?

However, even for small purchases using small amounts of cash, it is still important to control cash disbursements and have procedures in place to protect against loss