Eurasia: Economics & Business, 12(30), December 2019
DOI [Link]
UDC 334
ANALYSIS OF THE RAW MATERIAL PURCHASES AND CASH DISBURSEMENTS
ACCOUNTING SYSTEMS AS AN EFFORT TO IMPROVE INTERNAL CONTROL:
A STUDY IN PT. WONOJATI WIJOYO KEDIRI
Husaini Achmad*, Dzulkirom Moch., Fajarina Alfi Rizky Anita, Yaningwati Fransisca
Department of Business Administration, Faculty of Administrative Science,
University of Brawijaya, Indonesia
*E-mail: a_husaini@[Link]
ABSTRACT
This research aims to analyze the raw material purchases and cash disbursements
procedures implemented by the company and examine whether both systems have been
supported by adequate internal control. This research, conducted in PT. Wonojati Wijoyo
Kediri, employs a qualitative descriptive approach. Data were obtained from primary and
secondary data and collected through interviews and documentation. The research results
show that the raw material purchases accounting system and the cash disbursements
accounting system implemented in PT. Wonojati Wijoyo are good enough in supporting the
company's internal control. However, some weaknesses exist, i.e. dual functions in the
purchasing function and the goods receiving function, incomplete forms, and delegation of
functions to the cashier who should not make cash out proof documents.
KEY WORDS
Internal control, cash, accounting system.
A system is a procedure made in an integrated pattern in implementing the company's
main activities to achieve a goal Mulyadi (2016). An accounting system is a combination of
forms, records, procedures, and tools used to process data in order to produce financial
information needed by management to oversee activities for interested parties (Marom,
2002). The accounting system can provide information that can be used for the decision-
making process, information quality improvement, performance evaluation, internal control
and facilitating the company’s transactions (Sajady et. al., 2008).
The management of the raw material purchases process uses the purchasing system
method. The aim is to ensure the activity run efficiently and effectively to prevent various
practices that can cause the company losses. The raw material purchases accounting
system is an accounting system managing raw material purchases for the company's
production needs. It includes, among others, suppliers, price quotations, purchase returns,
and goods receiving reports. The raw material purchases accounting system uses
documents as a source of records and proof of transactions made by a company.
The cash disbursements accounting system functions to manage and record every
disbursement made by the company, from cash disbursements using checks or cash with
petty cash funds. The company will use checks for large cash disbursements and use cash
for small cash disbursements. There are several risks in the expenditure cycle, i.e. the
purchase of unneeded goods. Thus, it influences company goals, especially the operational
aspect in terms of cost-efficiency. In addition, it allows fictitious purchases indicated by
purchases that are not supported by adequate supporting documents. It should be
considered in the cash disbursements system (Romney & Steinbart, 2015).
Internal control in the company is very important to be conducted. Internal control of
raw material purchases and cash disbursements needs to be implemented because the
raw material purchases and cash disbursements systems are the company's main
activities. A well-structured accounting system will provide good internal control (Romney
and Steinbart, 2003). Internal Control is a technique used by management to provide
directions to employees in achieving company goals (Al Zubi et al., 2014). Internal control
not only protects the company's wealth stability in financial terms but also is able to
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DOI [Link]
maintain the accuracy of any data produced by the company thus helping to drive the
company's operational efficiency. Effective internal control is aimed at achieving quality
improvement (Adagye, 2015). Previous research states that there are several components
in internal control i.e. control environment, risk assessment, control activities, and
communication and monitoring (Michael, 2004; Steven, 2000; Arens et al., 2003; Kenneth,
2005; Raquel et al., 2005).
PT. Wonojati Wijoyo Kediri has implemented the raw material purchases accounting
system and the cash disbursements accounting system to improve its internal control that
serve to safeguard assets, ensure the accuracy of any data produced, prevent storage or
fraud, and promote the achievement of company efficiency. The implementation of the raw
material purchases accounting system and the cash disbursements accounting system in
the company are good enough. However, some weaknesses exist, i.e. dual duties performed
by the purchasing function and the receiving function and lack of documents that should
have been made by certain functions.
LITERATURE REVIEW
Purchases Accounting System and Procedures
According to Hall (2001), a system is a group of two or more interrelated components
or subsystems that serve a common purpose. While according to Widjajanto (2001), a
system is something having components that interact to achieve a certain goal and must
have three elements, i.e. input, process, and output.
According to Sutabri (2004), a procedure is a sequence of clerical activities, usually
involving several people in one department or more, which is made to ensure uniform
handling of repeated organizational transactions. Baridwan (2012) defines a procedure as a
sequence of clerical work, usually involving several people in one department or more, which
is organized to ensure uniform treatment of company transactions that often occur.
The purchases accounting system is one of the accounting systems generally used by
a company. In manufacturing companies, raw material purchases are executed with the aim
of processing raw materials into finished products. The purchases accounting system is
employed for raw materials procurement needed in production. According to Baridwan
(2012), purchases procedures manage ways in conducting all purchases of goods and
services needed by the company. These procedures start from the need for certain goods or
services until the purchased goods or services have been received.
Related Functions in the Purchases Accounting System
Related functions in the raw material purchases accounting system comprise the
warehouse function, the purchasing function, the receiving function, and the accounting
function which is responsible for recording accounts payable arising from purchase
transactions on accounts payable cards and recording the received inventory from purchase
transactions into inventory cards (Mulyadi, 2016). Carter & Milton (2004) states that the
purchasing function’s responsibilities include (1) receiving purchase requisition proof for
materials and equipment; (2) having information on sources of supply, prices, and shipping
and delivery schedules; (3) making and placing purchase orders; and (4) managing reporting
among the purchasing, receiving, and accounting functions. An additional function of the
purchasing function in some companies is to approve payment of each invoice received from
the suppliers.
The Cash Disbursements Accounting System
Cash disbursements are very necessary for the acquisition of goods and services in
carrying out production, such as the acquisition for resale or the use in production. Cash
disbursements procedures include the issuance of a check with approval for accounts
payable payments to reduce the company's obligations to creditors (Baridwan, 2012).
Meanwhile, according to Krismiaji (2002), this system aims to ensure that payment
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obligations to suppliers are accomplished in a timely manner and with appropriate total
costs.
The Accounts Payable Accounting System
The accounts payable accounting system is created to record accounts payable
transactions and record accounts payable reduction. According to Ikhsan (2009), accounts
payable liabilities are probable future sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or provide services to other entities in the
future as a result of past transactions or events. Meanwhile, according to Munawir (2004),
accounts payable liabilities are all company's financial obligations to other parties that have
not been fulfilled in which these liabilities are a source of funds or company capital from
creditors.
The Internal Control System
The implementation of internal control system policies in companies is very important
to safeguard company assets or wealth and to prevent error and abuse. According to
Sujarweni (2015), an internal control system is a system created to provide security
assurance for the elements in companies. Arens et al., (2003) states that internal control is
policies and procedures designed to provide management with reasonable assurance that
company objectives will be achieved. According to Romney and Steinbart (2006), internal
control can be classified into 3 types of control, i.e. preventive, detective and corrective
controls.
According to its purpose, the Internal Control System can be categorized into
accounting internal control and administrative internal control. Accounting internal control
comprises a plan of organization and all of the coordinated methods and measures to
safeguard organizational assets and check the accuracy and reliability of accounting data.
Meanwhile, administrative internal control focuses on promoting efficiency and encouraging
adherence to prescribed managerial policies (Mulyadi, 2001).
METHODS OF RESEARCH
This research uses the descriptive method with a qualitative approach. The research
was conducted in PT. Wonojati Wijoyo Kediri located at Jalan Mataram No. 1, Ngasem Sub-
district, Kediri Regency, East Java Province. PT. Wonojati Wijoyo is a manufacturing
company that manufactures and sells various processed wood products. Data were obtained
from primary and secondary data. Data collection techniques were interviews and
documentation. The research instruments used interview guidelines and documentation
guidelines.
RESULTS AND DISCUSSION
Analysis of the Raw Material Purchases System Implementation
Based on the analysis, the related functions are the warehouse function and the
purchasing function. The procedure and use of documents are already good enough.
However, goods order requisitions are still run verbally and do not use purchase requisition
documents to record all ordered goods requests. There is no receiving function which is
responsible for inspecting goods received from suppliers and making goods receiving
reports. As a result, each department performs its duties inefficiently.
Analysis of Documents Used
a) Goods Receiving Report
The use of the goods receiving report in PT. Wonojati Wijoyo is good because the
document shows that the goods received from the supplier have fulfilled the type,
specifications, quality, and quantity in accordance with the purchase order letter.
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b) Purchase Order Letter
The use of the purchase order letter in PT. Wonojati Wijoyo is good because it includes
the description of goods, the quantity of goods, unit price, and payment terms.
c) Delivery order
The use of the delivery order in PT. Wonojati Wijoyo is good because it has provided
clear and detailed information about the description of goods and the quantity of goods
ordered. In addition, it specifies the column to be signed by the recipient, security officer,
sender, and maker. The delivery order is also a legal proof needed in the streets.
d) Invoice
The use of invoice in PT. Wonojati Wijoyo Kediri is good because the document is used
as information on goods to be purchased by the company and as information on bill value
to be paid by the company.
e) Invoice Receipt
Invoice receipt in PT. Wonojati Wijoyo Kediri is good because this document is used to
replace unpaid invoices, so the ordered goods are not taken back by the supplier. It also
includes information about the purchase date, the quantity of goods ordered, the due
date, and the payment nominal.
PT. Wonojati Wijoyo Kediri uses some documents in the goods purchases process
because these documents are used to record all purchase requisitions and facilitate data
checking. Documents used in the raw material purchases system include the Goods
Receiving Report (GRR), the Purchase Order Letter (POL), the Delivery Order (DO), the
Invoice, and the Invoice Receipt (IR). Based on the analysis results, some weaknesses are
found, causing additions and improvements in the documents are needed. Based on the
weaknesses found, the authors suggest that the warehouse function makes a Purchase
Requisition Letter (PRT) to record all goods orders and to prevent fraud in purchasing goods
that should not have been ordered. Another weakness is related to the addition of the Price
Quotation Request Letter (PQRT) made by the purchasing function. It is needed to obtain
information about the price of goods and various purchase terms so as to enable the
selection of suppliers to be appointed and avoid price manipulation between suppliers and
the purchasing function.
Analysis of Procedures in the Raw Material Purchases Accounting System
a) Warehouse
The warehouse function places goods orders, then make a Purchase Requisition Letter
(PRT) in two copies. Copy 1 is forwarded to the purchasing function and Copy 2 is
archived by the warehouse function.
b) Purchasing
The purchasing function receives the copy 1 of the purchase requisition letter from the
warehouse function. The purchasing function makes a purchase order letter (POL) in 3
copies: copy 1 is sent to the supplier, copy 2 is forwarded to the receiving function, and
copy 3 is archived by the purchasing function. The purchasing function also creates a
Price Quotation Request Letter (PQRT) in two copies. Copy one is sent to the supplier
and copy two is archived by the purchasing function. After the purchasing function sends
PQRT and POL to the supplier, the purchasing function receives the invoice and delivery
order documents from the selected supplier for inspection. The documents will be initialed
by the head of the purchasing function if they are in accordance with the requisition.
c) Receiving
The receiving function receives the documents from the purchasing function and
crosschecks all documents. If they are in accordance with the requisition, the receiving
function waits for the supplier to send the ordered goods. If the goods have been
received, this function crosschecks the goods ordered and the goods received. If it is
suitable, this function makes a Goods Receiving Report (GRR) in three copies.
d) Warehouse
This function receives copy one of the goods receiving report from the receiving function
and crosschecks the documents and goods received. After that, this function initials the
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documents and make a record on the warehouse card. Finally, the documents are
archived by date.
Analysis of the Cash Disbursements System Implementation
a) The Accounts Payable Function
The accounts payable function in PT. Wonojati Wijoyo is good at performing its
responsibilities. The accounts payable clerk has cross-checked the documents received
and initialed if the documents are already suitable. This function also makes the accounts
payable subsidiary ledger to be given to the cashier function.
b) The Cashier Function
The cashier function in PT. Wonojati Wijoyo is good. The cashier function has carried out
its responsibility to make main raw material payments to the Bank and to make supporting
raw material payment directly to the supplier. After completing the payment, a "paid off"
stamp is given on the cash out proof documents. However, this function makes an error in
handling the cash out proof documents. The cash out proof documents should be created
by the functions with a higher authority such as the accounts payable function and the
accounting function.
c) The Financial Function
The financial function in PT. Wonojati Wijoyo is already good at carrying out its
responsibilities. Before providing authorization for the cash out proof, this function
crosschecks the cash out proof documents and supporting documents.
d) The Accounting Function
The accounting function in PT. Wonojati Wijoyo is good at performing its responsibilities.
This function has recorded cash disbursements transactions into the cash disbursements
journal and filed cash out proof documents and supporting documents issued. However,
cash out proof documents should be issued by the accounting function.
The documents used
a) Supporting documents
The use of supporting documents in PT. Wonojati Wijoyo is good. Supporting documents
are used as attachments when making cash out proof documents. Supporting documents
used include: the purchase requisition letter, the goods receiving report, the purchase
order letter, the delivery order, the invoice, and the invoice receipt.
b) Cash Out Proof
The use of cash out proof in PT. Wonojati Wijoyo is good. This document serves as a
cash disbursements order and a notification letter sent to the creditor as a source for
recording accounts payable reduction.
Organizational Structure
a) There is no receiving function in the organizational structure. The receiving duty is
performed by the purchasing function. Meanwhile, the purchasing function is responsible
for receiving information about the goods to be purchased, determining the supplier to be
selected in goods provision, and issuing a purchase order letter to the selected supplier.
b) The goods purchasing function in the company does not intervene with the accounting
function. Based on good internal control elements, these two functions are intended to
safeguard the company's wealth.
c) Every time purchase transactions will be made, the purchasing function having a dual
function as the receiving function crosschecks the order from the warehouse function
carefully and thoroughly.
d) Purchase transactions are not carried out completely by one function. Each transaction
will always have an internal check resulting in each employee being examined for
accuracy and reliability by other functions.
Based on analysis results on healthy practices in the cash disbursements system, PT.
Wonojati Wijoyo Kediri has good practice as can be seen from:
a) All cash disbursements documents are numbered sequentially.
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b) After conducting a cash disbursements transaction, the cash out proof documents and
supporting documents are stamped "Paid off" by the cashier function.
CONCLUSION
Based on the analysis results on the raw material purchases accounting system, the
cash disbursements accounting system, and the internal control system in PT. Wonojati
Wijoyo Kediri, it can be concluded that the raw material purchases accounting system and
the cash disbursements accounting system implemented in PT. Wonojati Wijoyo are good.
However, both systems still do not support maximum internal control because some
weaknesses are found.
Suggestions given are: (1). it is suggested that the warehouse function presents the
purchase requisition letter document. The use of this document can facilitate the purchasing
function in conducting goods orders to the suppliers and to avoid errors in ordering goods
that should not have been ordered but are included, (2). it is suggested that PT. Wonojati
Wijoyo Kediri separates the responsibilities of the purchasing function and the receiving
function. The purchasing function is responsible for ordering goods to the suppliers, while
the receiving function is responsible for receiving goods from the suppliers. The two
functions should be separated to enable each function to work optimally and avoid
manipulation in the raw material purchases.
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