East-Africa TVET College

ACCOUNT AND BUDGET SUPPORT

LEVEL-IV

Learning
Guide
MODULE TITLE: Evaluate and Authorize Payment Request

MODULE CONTENTS

 Purchasing from supplies

 Prepare Payment documentation
 Authorize customers payments

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LO1- Accounting for Materials Purchasing

NEED FOR CONTROL OF MATERIALS

In most manufacturing businesses, the cost of raw materials is a major part of the total
manufacturing cost of each product. Decisions regarding materials and their management
are based on product knowledge, good judgment, and accurate, up to the minute data.
Some of the problem involved is the following:

 Quality and cost of materials must meet the specification on which sales price are
based.
 Materials must be protected from loss or the theft.
 Correct quantities and types of materials must be on hand at the right time for
production to move on schedule.
 Risks of spoilage and obsolescence must be minimized.
 Cost of material handling and storage must be kept to a minimum.

MATERIAL PURCHASING PROCEDURES

The responsibility for purchasing materials is given to the purchasing department or agent.
This individual should buy materials at proper time, at the most economical cost, and in
correct quantities to the company.
The purchasing staff keeps informed of various sources of supply, negotiates purchase
contracts, prepares purchase orders, and follows through on delivery. The routine work of
the purchasing staff begins upon receipt of a purchase requisition.
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a) Reorder Routine:
Routine: - Now you need to look at the typical recorder routine step by step. To
determine when an item has reached a level where it should be recorder you should
conceder the following factors.
 The frequency at which the material is used.
 The amount of time it takes for the material to be delivered from the supplier.
This is called lead-time.
lead-time.
 The minimum level of materials that should be on hand to ensure that the
company does not run out of the material. This is known as safety stock.
stock.

b) Purchase requisition:
requisition: - Once the quantity of material falls below Reorder point, the
Storeroom supervisor completes a purchase requisition requesting that material should be
Ordered. The purchase requisition is a properly approved (authorized), written request for
Materials. An original and one copy of the purchase requisition should be prepared. The
Original should be sent to the purchasing unit or department as a request for the materials.
The copy is retained in the storeroom file. Some companies use more copies.
c) Purchase order:
order: - When the purchasing staff receives the purchase requisition, a
supplier should be selected. In most cases several suppliers are asked to quote prices or
make bids. In choosing a supplier, the purchasing unit considers dependability, quality of
materials,
materials, delivery date, and similar factor as well as price.
price. After the supplier has been
chosen, the purchasing agent prepares a purchase order. The purchase order represents
written authorization to the supplier to ship the specified materials. This form contains all
necessary details, such as delivery date, method of shipment, unit price, and account
number to be charged. The number of copies prepared varies from company to company.

Most companies prepare in five copies. (1) The original is sent to the supplier (2) Two
copies are maintained by the purchasing unit in an unfilled order file. (3) One copy is sent
to the storeroom for verification. The storeroom clerk compares the purchase order with the
requisition and keeps the Purchas order in an on-order file. The final copy tells the
receiving clerk when the materials should arrive. This procedure gives time for any
preparation like space and so forth. For internal control purpose all purchase order should
be pre numbered. At the end of the month

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The cost accountant verifies that all numbered form either have been sat to the supplier or
are on hand. This mechanism ensures that purchase orders are used only for authorized
person. The sample for purchase order is indicated below
d. Receiving report: - When materials are received from the suppler, they go to the
receiving clerk. The receiving clerk is responsible for: -
1. Unpacking them
2. Checking quantities and physical condition
3. Delivering them to the storeroom.
One copy accompanies the materials to the storeroom for comparison with the purchase
order and enters in the storeroom records. The storeroom supervisor signs the final copy to
confirm that the materials have reached the storeroom. This copy is then kept in the
receiving clerk permanent files.
The storeroom clerk records the receipts of raw materials in a subsidiary ledger, the
material Ledger by making an entry on the appropriate material ledger card.
e. Comparing documents-
When the invoice is received from the supplier, it is sent to the purchasing unit. Many
companies prefer the invoice to arrive before the shipment, because it allows, for
verification of the purchase order before the shipment is accepted. The purchasing units
hold the invoice and the purchase order in the open purchase order file until the receiving
report is available for comparison.
The purchasing unit compares the supplier invoice (purchase invoice) with the purchase
order and receiving report to make sure the following point.

1. Goods ordered must have been received in good condition and same as indicated
on the purchase invoice.
2. Details on the invoice like, terms, unit price, shipping charge agrees with order
specifications.
3. Correct computation.

If all documents agree, responsible person in purchasing unit, attaché together one copy
each of the invoice, receiving report, and purchase order and keep them in a completed

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purchase file alphabetically by supplier. Next step is preparing disbursement voucher which
should also reflect the value of items net of damaged and rejected with other documents
will be sent to the accounting department.
f. Recording the voucher
When accounting department receives the voucher, invoice, and attached paper; verifies
extension and footing compute discounts, and checks all other computation. The voucher
clerk also checks that all supporting documents are included in the file and that they are
properly approved and signed. This double check is part of the internal control system.

After verifying the account distribution against the purchase order, the voucher clerk enters
the purchase in the voucher register as a debit to Raw material account and credit to
voucher payable. After entry is made in the voucher register, the voucher is sent to the
treasurer’s office and it will be filed in the unpaid voucher file according to the last date on
which the discount may be taken.
g. Paying voucher

Before the due date, the voucher is removed from unpaid voucher file. A staff from treasury
department will prepare a check for the amount of the voucher. Then the check will be
entered in the check register and will be sent to the supplier. Then the voucher and the
entire supporting document should be placed in the paid voucher file.

LO2- Prepare payment documentation

 STORING AND ISSUING MATERIAL
Internal control procedures for purchasing must be matched by similar procedures for
storing and issuing materials in order to truly safeguard the investment. These
precautionary measures are necessary to avoid damage, waste, theft, and obsolescence.
Physical control begins the moment the materials are delivered to the storeroom, and
continues to be applied during storage and issuance. Written control begins with the
receiving report and recording the materials ledger, and continues through entries to record
issuance and use.
STORAGE OF MATERIALS

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It is to the advantage of the firm that admission to the storeroom should be restricted
without a proper permeation of the storeroom supervises. The storeroom supervisor is
responsible for the: -
1. Material ledger card
2. The protection of material in the storeroom
3. Identification of the material

Each type of materials is assigned a number, indicating the type of materials and its
location. Materials should be stored according to it nature in a systematic manner in bins,
on racks, or on shelves.
Attached to each shelves or rack a bin tag should be maintained. It is not mandatory firms
should maintain this tag or card. It is an informal but carefully maintained record showing
only the quantities of the material received, issued, and on hand at all times.
ISSUANCE OF MATERIALS
The use of all materials must be limited to properly authorized purpose.

1. Materials requisition
No material should be issued from storeroom without a written form is called a material
requisition.
requisition. It is prepared in duplicate by the department head or supervisor.
The requisition form should indicate.
 The quantity of material
 Material number
 Description and job no. To be charged
 In the case of indirect material, the requisition shows the department to which
the materials to be charged.
The storeroom supervisor issues the materials and makes the necessary notations on the
requisition, upon receipt of the material requisition. One copy is filed as a receipt and the
second copy is given to the storeroom clerk. The storeroom clerk enters the unit price and
computes and enters the total amount.

2. Materials ledger

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Completing the cost computations on the requisition, the storeroom clerk records and
enters in the issue section of the material ledger card, calculates the new quantity on hand,
and records it in the balance section.
A materials ledger card is kept for each type of materials available in the storeroom. Each
of them serves as a perpetual inventory record. The material ledger card is a subsidiary
ledger reconciled against the Raw Material controlling account. The balance of Raw
material control and the sum of the Birr amount on material card should agree at the end of
the period.
3. Material Requisition Journal
After information from the requisition has been recorded on the related material ledger
card, the requisition will be forwarded to the cost clerk, to journalize the transaction in
material requisition journal so that the effect of the issue will be reflected on in the general
ledger cost accounts.

Such kind of special journals are mostly used in a job order costing system. It improves
efficiency of the journalizing process when compared to using only a general journal. These
special journals are used to avoid writing the many long and tedious entries involved in
issuing and using materials.

RETURN OF MATERIALS OF STORE ROOM

At a time materials that have been issued may be returned to the warehouse. This can happen due
to:
 Taking excess material
 Withdrawing the wrong material

Whenever materials are returned they should be accompanied by a returned materials

report similar to the material requisition. The department that originally the material should
fill out the report. After storeroom supervisor checks the returns, the bin card is adjusted by
showing the number of units returned in parentheses in the quantity issued section. The

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number of units returned is added to the balance. Then, the returned materials report is
given to the storeroom clerk, who follows the procedure below.

1. Enter the unit and total cost figures on the report. The unit cost figure used is the
same as that used when the materials were charged out.
2. Make an entry in parentheses in the issued section of the materials ledger card.
The new quantity and cost amounts are then entered in the balance section of
the card.
3. Send the returned material report to the cost clerk.

Due to requesting too much material, withdrawing the wrong materials, or other reasons
materials that have been issued are returned to the storeroom. When materials returned
must be accompanied by a returned materials report, which is similar to the material
requisition.
After the storeroom supervisor checks, the returns, the bin card or tag is updated (adjusted)
by showing the number of units returned in parentheses in the issued column. This
adjustment will increase the balance. Then the returned material report is forwarded to the
storeroom clerk, who performs the procedures listed below.
1. Record the unit cost figure on the report, which is the same as that used when
the materials were charged out.
2. Enter in parenthesis in the issued section of the material ledger card, which will
increase the balance by the same amount.
3. Pass the returned materials report to the accountant.
The cost clerk completes two important entries.
1. An entry in parentheses in the indirect material column of the department
overhead analysis sheet (in the case of indirect material) or in the materials
section of the appropriate job cost sheet in the case of direct materials.
2. Recording the return in the returned materials journal.

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LO3: Authorized payment
PRINCIPLES OF INTERNAL CONTROL

The above-discussed purchasing procedures are practical and efficient. They also follow
important principles of internal control as out lined below.

a. An authorized person must make a request of a purchase.

b. A purchase order must be prepared and approved by an authorized person after a
purchase requisition has been received.
c. All materials received must be carefully checked to see that, they correspond to
those ordered and are in good condition.
d. Payment is made only upon proper approval.
e. To lessen the risk of fraud or error, the steps in the purchasing procedure should be
delegated to different individual.
f. All documents should be pre numbered.
g. Materials should not be issued without proper authorization.
h. Materials should be protected, clearly identified, and stored in a particular place.
i. Restriction of admittance without authorization.
j. All receipts and issue of material should be recorded on ledger card.
k. Different personnel should involve in storage, and issuance operation.
GLOSSARY

Raw material: - Materials include direct material, supplies, and indirect material.
Purchase requisition: - a document or form used by the stores or user department to
request for purchase.
Material lager: - A lager where in an account is maintained for each item of
materials by the storeroom.

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Purchase order: - A legal document prepared by the purchasing department
and placed with the supplier asking to deliver the material.
Receiving report: - On completion of the inspection of the materials supplied
by the supplier, the details of the materials will be entered.
Group Assignment
Part one Give the possible answer for the following question
1. Why need control of material
2. How to be receive the report
3. What is the step of purchasing material
4. What is the step of issued material
5. Why material returned after to issued the store room
6. How to control the authorized payment
7. What is responsible of store room to store material
8. Differentiate between purchase rsequisition and materials requisition.
9. List the three places where a materials requisition for direct materials and indirect materials
must be recorded.
10. What is a returned materials report?
11. Describe the procedures used in recording materials requisitions and returned materials
report on the materials ledger cards.
12. How are materials requisitions used in controlling the materials inventory?
Part two Record the following event
1. During the month of April, 1999, the production department of Commercial Printing Press
had requisitions totaling Br.40, 000 for direct materials and Br.12, 000 for indirect materials.
Required: prepare the necessary entry, in general journal form, to record the cost of materials
Requisition for the month.
2. Refer to exercise 1 above, assume that the production department had returned Br.5000 in
direct materials and Br.1500 in indirect materials.
Required: prepare the necessary journal entry to record the cost of the materials returned to the
Store room.
3. A.B.C. manufacturing company had requisitions $179,240 for direct material and $19,520 for
indirect materials.

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Required: Prepare the entry in general journal form to record the cost of materials requisitioned
for the month.
4. During September 2002 DH Geda production department had returned $ 10,700 in direct
materials and $ 920 in indirect material
Required: prepares the entry in general journal form to record the cost of the materials
requisitioned for the month.

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