Cash Disbursement Cycle

According to James Hall [2011], “the cash disbursements cycle processes the
payment of obligations created in the purchases system. The principal objective of this
system is to ensure that only valid creditors receive payment and that amounts paid are
timely and correct.” Certain tasks are performed by different key processes and explained in
the following section:

Accounts Payable Department

The assigned personnel checks accounts payable voucher for items due and
forward the voucher and its supporting documents to the cash disbursement department .

Cash disbursement department

The cash disbursements personnel receive a copy of the vouchers and

reviews the documents for completeness and accuracy. For each disbursement, the
personnel prepares a three-part check and records the check number, money value, voucher
number, and other related data in the check register. The check and the supporting
documents, goes to the cash disbursements department manager or treasurer for his or her
signature. The negotiable portion of the check is mailed to the supplier. The personnel files
one copy of the check and return the voucher packet and check copy to the accounts
payable department. Lastly, the entries are summarized to check register and send a journal
voucher to the general ledger department.

Accounts Payable Department

Once the Accounts Payable personnel received the voucher packet, the
personnel removes the outstanding payable by recording the check number in the voucher
register and filing the voucher packet in the closed voucher file. Next, the clerk sends an AP
summary to the general ledger department.

General Ledger Department

The received journal voucher from cash disbursements and the account
summary from accounts payable are posted to the general ledger control accounts and files the
documents.

According to Leslie Turner [2013]” The processing flow related to procurement activities
requires payments be made for purchase obligations that have been incurred. The cash
disbursements process must be designed to ensure that the company appropriately processes
payments to satisfy its accounts payable when they are due.” Cash disbursement includes
payment option of checks or currency. The accounts payable department is tasked for the
notification to make needed cash disbursement. Before the actual payment is made, specific
steps must be followed to make the process effective and efficient. These steps correspond to
vendor account reconciliation, cash management techniques, and payment authorization.
Vendor account reconciliation pertains to the review of the outstanding dues in the account
payable on regular basis for accuracy providing details of amounts owed and paid. Effective
cash management technique deals with invoice copies that follow chronological order by due
date so that disbursements are settled in timely manner. The entity should be mindful of paying
by due date to avoid late payment and to establish good terms with its vendor. There are times
that vendors offer discounts for prompt payment and it is the responsibility of the account
payable personnel to take advantage of the discounts. If the files are arranged chronologically
the entity can avail discounts within due dates. The cash disbursement must also be notified to
make payment by the discount date. In addition, payment authorization pertains to the signing of
check which is reserved for the members of the management. The authorized signer can
compare and verify the propriety of the disbursement by reviewing the check along with the
supporting documentation, once the check is signed, it will be sent to the vendor. A copy of the
check and supporting documents will be forwarded to the cash disbursements and accounts
payable departments. Moreover, the related invoice should be canceled once a payment has
been made to show that it has been paid. A money disbursement clerk must clearly mark the
invoice with the date and check number used to meet this duty in order to cancel an invoice. A
copy of the check or remittance advice can be attached to the invoice to accomplish this task.
Each method provides a written disbursement trail and avoids the likelihood of duplicate
payments. All reports were stored in check-number sequence in the accounts payable section.
Section of accounts payable will then update their supplier accounts to reflect the current level
of payment. Cash disbursements in the accounting system should be reported as soon as the
payment is made. A cash disbursements clerk will prepare a cash disbursements journal, which
is a chronological listing of all payments.

Flowchart

Current situation

RRL

According to Glenn Helms [2018] “The cash disbursements cycle encompasses payments that

originate from various accounting subsystems.” Cash disbursements can be made in various

ways. Many small enterprises use the traditional method for cash disbursements which requires

the generation of paper checks that are mailed to vendors. However, other business entities use

a cash disbursements method that has existed for decades which is the Electronic Data
Interchange (EDI). Oftentimes companies do not issue paper checks or make electronic

disbursements as they have their bank account drafted for recurring payments such as rent or

utilities. Many payroll systems do not require the issuance of a paper check but rather an

electronic transaction file is generated which provides direct deposit to the employee's bank

account. In addition, for other expenses, many profit and not-for-profit entities provide their

employees with procurement cards to purchase items of a relatively low currency amount.

The types of controls that should exist in a cash disbursement system vary widely depending

upon the system from which the cash disbursement originates and how the cash disbursement

is made. However, certain controls, such as segregation of duties, should be established in all

types of cash disbursements. For example, a retail store's largest volume of cash

disbursements is for purchases of inventory. Its purchasing department orders inventory

from approved suppliers. A sequentially numbered purchase order is sent from the
purchasing department to the vendor, receiving department, and accounting
department. For illustrative purposes, assume all goods are shipped FOB shipping
point. When received by the retail store, the receiving department will inspect and count
the goods, complete a numerically sequenced receiving report, and forward a copy of
the receiving report and packing slip to the accounting department that is in-charge for
all disbursements. The packing slip contains information as to the items that were
shipped, items on backorder, shipping address, billing address, customer purchase
order number, and vendor contact information. Then, the accounting department
receives invoices from vendors which contain, among other items, payment terms such
as 2/10, n/30. a list of goods that were shipped, purchase discounts (if any), and total
amount due. An employee in the accounting department matches the appropriate
purchase orders, packing slips, receiving reports, and vendor invoices. This provides
evidence that the purchase was authorized and the goods were received. The vendor's
packing slip and invoice also provide evidence as to the quantity of goods that were
shipped. The said department then forwards copies of the invoices to the general ledger
department to update the accounts payable control accounts. The accounts payable
department then updates the accounts payable subsidiary accounts based upon a
review of all documents. In many formal payment systems, a formal voucher packet is
created for all disbursements, including purchases from vendors. The numerically
sequenced voucher packet for purchase of vendor goods typically contains the
purchase order, receiving report, packing slip, and vendor invoice. A voucher form on
the front of the voucher packet includes information such as the relevant purchase order
number, account distribution, method of payment (either cash, check, or direct deposit),
vendor invoice number, and approval signature. Then, the accounts payable
department will forward a copy of the invoice to the general ledger department to update
the accounts payable control account.

Many business entities do not maintain a separate accounts payable account for each

vendor because they pay by invoice, not by vendor statement. The total of all outstanding

invoices by vendor would equal total accounts payable. Some companies maintain both a file of

outstanding invoices by vendor and an accounts payable file for each vendor, as well as a

related accounts payable control account within the general ledger. An accounts payable

account for each vendor allows the retail store to review all transactions with each vendor,

including purchases, payments, discounts taken, and more. Periodically, the balance of all

subsidiary accounts payable accounts should be reconciled to the accounts payable general

ledger account. Any differences should be resolved by appropriate personnel. Most vendors

send monthly statements that contain their customers' beginning balances of accounts

receivable (accounts payable for the buyer), transactions that occurred during the month, and

ending balances of accounts receivable. Accounts payable (of the buyer) should reconcile their

balance of accounts payable with the balance of accounts receivable contained on the monthly

statement provided by the vendor. Note that the companies that do not have a subsidiary or

control account for accounts payable will find this reconciliation to the vendors' statements
difficult to perform. Without a control account, the reconciliation process is typically a manual

process as all of a particular vendor's invoices need to be added to create the accounts payable

balance for each vendor. In the example of the retail store, the accounts payable department

forwards an approved voucher package to the cashier and a copy of the voucher form to the

general ledger department. Note that the accounts payable and general ledger departments

report to the controller. The cashier reports to the treasurer. The cashier will prepare a check

based upon the information on the voucher package. The voucher package and check are sent

by the cashier to an authorized employee in the treasurer's department who will review the

documentation that supports the check. This authorized employee will sign the check and the

check will be mailed by another employee. Checks over a certain currency limit should require

dual signatures. To prevent paying the same invoice twice, the voucher package is cancelled by

the check signer and returned to the accounts payable department. A payment notice is sent

from the check signer to the general ledger department to update the accounts payable control

account. The cashier and the check signer will account for the numerical sequence of the

voucher packages. The accounts payable department will account for the numerical sequence

of cancelled voucher packages.