Fundamentals of Accounting Office Organization 12. Procedure to Follow to Purchase Material for the Office You may need to procure office supplies, or be involved in purchasing material on behalf of the office, and a prior understanding of the purchase process will help you deliver on the job. This lesson discusses some of the common systems followed while procuring office supplies. You will gain familiarity with these systems.
12.0 Objectives After going through this lesson, you will be able to: i. ii. iii. iv.
Differentiate between types of Purchases and Purchase Approvals Explain how an Imprest System works Understand the process of getting a Purchase Approval Understand the process of getting a Capex Approval
12.1 Introduction Small purchases and reimbursements, like stamps, paper, staples, pens, pencils, erasers, and parking fees, are a part of day-to-day office life. Sometimes, larger expenditures like fax machines, printers, and photocopiers are also purchased. It is necessary to account for these expenses. The company cannot pay for an expense without a complete record of the reason for the expense, and what was purchased. This is for two reasons – one, to keep track of expenses and minimise wastage; and two, to ensure that there is no theft or misuse of funds happening within the organization. At the same time, the organization wants to make the process as easy and quick as possible. This lesson will walk you through the purchase process, and the systems that are usually put in place to keep track of the various transactions in an easy and painless way.
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12.2 Purchases and Purchase Approvals All purchases fall into two categories: a. Revenue purchases b. Capital purchases Different companies break purchases into these categories based on different rules. As a concept, a purchase which will benefit the company for one year or less is considered a ‘revenue’ purchase; one which will benefit the company for more than a year is considered a ‘capital’ purchase. Example of revenue purchases are: paper, ink, staples, stapler, register, file, keyboard, pen, pencil, marker. Examples of capital purchases are: printer, scanner, fax, computer, photocopy machine. Items which last longer but cost little are usually also considered revenue purchases, eg, stapler. There is a sub-category of revenue purchases, called petty cash purchases, which have an even simpler purchase approval process than revenue class items. This is because the value of the items is negligible. The approval required for any purchase depends upon the type of purchase. A petty cash item is handled differently from a revenue item, which is handled differently from a capex item. Different systems have evolved to keep track of each type of purchase. a. Petty Cash: Imprest b. Revenue: Simple Approval c. Capex: Capex Approval.
Self-check Questions 1. State what type of approval needs to be taken for each of the following products: Stapler, staples, paper, photocopier, toner for the photocopier, dustbin.
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12.2.1 Typical Functioning of an Imprest System The management develops a policy of how much the imprest amount should be, and what maximum expenditure can be paid with petty cash. For example, you may establish a petty cash fund of Rs. 500, and have a policy which says that payments for items costing over Rs. 50 must be made through approval rather than reimbursed through petty cash. The fund should be enough to cover petty cash expenditures for about a month. This is because if it is too small you will have to constantly replenish the funds, and if it is too large it means you have cash on hand which could be more safely kept in the company’s bank account. The petty cash fund should be kept in a locked box or drawer by the custodian, who should be the only person to have access to this cash and to be responsible for all petty cash activity. To disburse petty cash funds, the organization will need to use petty cash vouchers for documenting each transaction, and determine who in the organization can approve petty cash payments. A petty cash voucher should have the date, amount, the recipient, the approver, and the purpose for which the amount was used. 12.2.2 Establishing the Fund Once management has defined the size of the fund, the responsible officer issues the funds to the petty cash custodian to establish the petty cash fund. For example, if you have a Rs. 1000 petty cash fund and Rahul Gupta is the petty cash custodian, Rs. 1000 is issued to Rahul Gupta to initiate the fund. To reimburse someone for a small purchase, Rahul should obtain proof of purchase, usually a receipt from the store, post office, etc. The recipient must complete a petty cash voucher, detailing the nature and reason for the purchase. After the voucher has been approved by the appropriate person, the reimbursement is given by Rahul. Most stationery stores sell pads of petty cash vouchers. Once the fund is substantially depleted, Rahul adds up the vouchers and assigns them into appropriate categories (e.g., postage, printing and copying, office supplies, etc.) The total of receipts plus cash available must equal Rs. 1000 in order to prove that all money has been accounted for. When the account has been balanced, additional funds are issued to Rahul, for the exact amount of the vouchers/receipts, bringing the fund back to its original balance of Rs. 1000. Therefore, in the example described above, Rahul totals the receipts in the petty cash box and determines that they fall into the following categories: Postage: Rs. 15.00 Printing/Copying: Rs. 275
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Office supplies: Rs. 345 Total: Rs. 635. In addition, Rahul confirms that there is Rs. 365 in cash remaining with him. To bring the petty cash fund back to full value, Rs. 635 are re-issued to Rahul. This method of maintaining a constant amount in petty cash through a combination of cash and receipts is called an imprest system. The petty cash vouchers should be stapled to the summary of expenses prepared by Rahul and filed away so they are not reimbursed a second time.
Self-check Questions 2. What are the five things that a petty cash voucher must have? 3. Put the following in correct chronological order: a. Defining the value of the Petty Cash Fund b. Appointment of a petty cash custodian c. The Custodian adds up the bills and sorts them into various categories, so that expenses in each category can be determined. d. Establishment of the Petty Cash Fund by issuing funds to the Custodian. e. The Petty Cash Fund is brought back up to original value by delivering the bills to the issuing officer and taking cash of the same value from him. f. The Custodian obtains proof of purchase (bill), and reimburses the petty cash expenditure after getting the Petty Cash Voucher.
12.2.3 Simple Approval For expenditures that are beyond the maximum limit or nature of petty cash reimbursements, but are still revenue expenditures, simple approval by the authorized officer is required. ‘Authorized’, in this context, refers to the DOP which has been defined in advance by the organization. Please refer to the explanation of what a DOP is from the Glossary section at the end of this lesson for greater clarity. Usually, the following process is followed: 1. A purchase order is prepared for the approved vendor. o If there is no approved vendor for that product, the standard process defined for vendor selection/ approval must be followed to identify a suitable vendor. 2. The authorized officer signs it. 3. Based on the purchase order, the selected vendor delivers the product, with the invoice. 4. The authorized officer signs the invoice, perhaps with another officer’s counter-signature, depending upon how the DOP has been defined. 4
5. The signed invoice is handed over to the finance team for payment to the vendor, in line with the payment terms and conditions that had been stated in the purchase order.
Self-check Questions 4. What is the basis for defining ‘Authorization’?
12.2.4 Capex Approval Capex approval is a more complicated process. The following steps are followed: 1. One officer is designated to be the capex coordinator, project manager, or capex owner. Different organizations give different names to this officer, who becomes responsible to ensure that all the steps are followed correctly. 2. This officer puts together the documentation for capex approval. This includes: o Sanction Note: Document explaining the need or expected benefit from the capex; o Financial Justification: Based on standard financial parameters, like Return on Investment, Net Present Value, Internal Rate of Return. The Capex coordinator may get help from internal financial resources to prepare this section. o Capex Form: This form has details about the capex start date, end date, amount, purpose, coordinator, the initiator, the recommender, and the approver of the capex. Progress and closure of the capex is managed on the basis of this form. 3. This set of documentation is put up to the approver and recommender of the capex, and after their signature, the expenditure can be incurred. 4. If there are cost and/ or time overruns in the course of the capex, some organizations require the same to be documented and approvals given by the authorized officers. 5. After the project is over and all expenses have been booked, a capex closure report needs to be prepared, to close the capex.
Self-check Questions 5. Who is responsible for performing all the activities involved in getting a capex approved?
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12.3 Summing Up • •
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Offices procure material for different amounts, and for different purposes. The office may derive a benefit from this expenditure for less than a year, or for more than a year. The way the office accounts for this expenditure changes based on how long the benefit will be enjoyed. For very minor expenses, the office may put in place a petty cash or ‘imprest’ system. Under this system, a custodian is given a fixed sum of funds which can be used for making payments upto a pre-defined maximum for a certain set of purposes only. Periodically, this fund is topped up, provided all cash paid out can be completely accounted for. For other expenses which will give benefits for less than a year, simple approval by an officer or officers who are authorized by their DOP is sufficient. For expenses that will give benefits for more than a year, or for large expenditures, a capital expenditure (‘capex’) needs to be sanctioned, with appropriate documentation and control to prevent misuse. You would do well to find a computer and try out what you have learnt today, so that the learning is internalized.
12.4 Answers to Self-check Questions 1. Types of approvals needed: o Stapler: Simple approval o Staples: Imprest/ Petty Cash system o Paper: Imprest/ Petty Cash system o Photocopier: Capex Approval o Toner for the photocopier: Simple Approval o Dustbin: Simple Approval You will observe that the same object (say, a stapler) may require a simple approval in one organization, and may not in another. As such, while you may understand the basis on which the classification above has been made, it is not the only ‘correct’ solution. 2. A petty cash voucher should have the date, amount, the recipient, the approver, and the purpose for which the amount was used. 3. Correct Order of Activities in an Imprest System: b a d f c e 4. The DOP is the basis for defining authorization. 5. Capex Coordinator, Project Manager or Capex Owner
12.5 Terminal Questions 1. What is an imprest system? If you were responsible for setting up an imprest system in your office, what would be the amount of the fund, maximum limit, and purposes for which you would permit its use? 2. What is the capex process? Explain an ideal process, or the actual process in use in your office.
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12.6 Glossary • • •
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Petty Cash: A small amount of cash kept with the custodian to enable payment or reimbursement of small values. Petty Cash Custodian: The employee entrusted with the responsibility of maintaining the petty cash, and making the payments or reimbursements. Petty Cash Voucher: A document signed by the recipient of the petty cash funds, acknowledging receipt, reason for expense, and value spent. The Custodian’s balance of petty cash is topped up periodically only if the custodian is able to show that there were no ‘leaks’ from the petty cash, and all funds are accounted for. Imprest: A system based on petty cash. The custodian is provided with a certain amount of (petty) cash, which gets used up based on expenses. When the petty cash balance reaches a pre-defined minimum level, funds equal to the value spent are added back to the Petty Cash balance to bring the balance back to the full value. Eg, if the petty cash amount is Rs. 200, and Rs. 114 were spent for various expenses leaving a balance of Rs. 86, Rs 114 will be added back (‘topped up’) to bring the balance back to Rs. 200, after the petty cash custodian shows where the money has been spent. Capex: Short form for ‘Capital Expenditure’. Larger expenses, like purchases of printers, scanners, fax machines, etc are covered through a capex system. Different organizations have different capex systems, but the standard across organizations is that a capex justification must be provided, and at least two officers with the relevant signing authority must sign it before the equipment can be purchased. DOP: An acronym for ‘Delegation of Power’. The DOP defines the limits within which an officer of the company can exercise his decision-making. If an officer has a DOP for full sanctioning authority upto Rs. 10,000 for office supplies, for example, the officer can go ahead and authorize expenses up to this limit without requiring any other supporting signature while buying office supplies. Asset Register: Any capital item purchased must be entered into a register, called the asset register. This register maintains the list of all capital items owned by the company. The ‘register’ may be physical or electronic in nature (maintained as a file on the computer).
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