CHAPTER 9: PROCEDURES FOR
PURCHASING
9.1 Ordering and Receiving Materials,
Goods, and Services
Businesses buy raw materials (for use in production); goods
(finished goods for internal use or resale. E.g. coffee, tea, etc.);
and services (electricity, cleaning, etc.).
The purchase requisition is an internal control document that
is predominantly utilized by the stores department, but can be
used throughout an organization, to request the initiation of a
purchase. The authorized purchase requisition is then passed
on to the individual/department in charge of purchasing so a
purchase order can be prepared.
A purchase order (PO) is sent to the supplier to request a
delivery of goods. Once a PO is approved it legally binds the
business organization, so it’s essential that only a select few
people can authorize POs. Access is granted to the accounts
department (to compare to invoice); requisitioner (without
details concerning pricing); storekeeper (if used for production,
again, no pricing information.); and the purchasing department.
The supplier then despatches materials along with a delivery
note that is signed upon confirmation of receipt. POs can also
be used for services or products not related to production
(expenses).
Goods received are booked into the company’s computer
system as a record of receipt after all discrepancies are
resolved and delivery note signed. The accounts department,
warehouse/stores function (to update inventory records),
purchasing department (to match with PO) and if applicable
even the “goods inward department” (to match against
delivery note) are given access to goods received information.
9.2 Recording the Movement of Raw
Materials
The warehouse usually stores raw materials and until they
are required by a cost centre, the inventory is kept under
control of a storekeeper. A material requisition is prepared
by a cost centre (usually the production function) to request
materials needed from the store. A materials return records
unneeded goods being returned to the warehouse. The cost
centre returning them is credited (loss of an asset). an
inventory record is shown below:
Shows location of the inventory, the unit in which the
material is measured (kg) and balances in real-time. Everything
shown from the start of this chapter is usually digitalized. MA1
assumes it is.
A Perpetual Inventory System ensures quantities are updated
immediately after receipt/issue. However, a Periodic Inventory
System counts inventory at regular intervals to establish
quantity.
9.3 Stores Ledger Accounts
The storekeeper monitors inventory and maintains inventory
records while the accounting department maintains stores
ledger accounts. Inventory records and stores ledger accounts
are reconciled regularly. Rather than quantity, the stores ledger
account focuses on inventory value (after each issue/receipt).
Free Inventory is inventory that is available for requisition.
9.4 Processing Purchases
9.5 The Material Control Cycle
There are three types of inventory, each of which is
accounted for in store records:
The material control cycle: