Quiz 11: Auditing the Purchasing Process

Business

Categories of expenses An expense refers to the amount spent to earn income such as Rent paid, Electricity bill, and wages paid. The differences among the three categories of expenses are explained below: • Product costs are the expenses incurred for specific transactions or events such as production of goods, and are recognized at the time of revenue recognition. For example: Cost of goods produced.• Period costs are the expenses incurred for services for a certain time period.For example: Storehouse rent, Administrative expenses. • Other expenses are incurred for some assets for a certain period in order to get benefits in the future years. For example: Depreciation expenses.

The major types of transactions that occur in the purchasing process are: (1) Purchase of goods and services for cash or credit. (2) Payment of the liabilities arising from such purchases. (3) Return of goods to suppliers for cash or credit. The financial statement accounts that are affected by each type of transaction: (a) Purchase transaction occurs on the purchase of goods and services. Accounts involved in purchase transaction are: purchase account, stock account, suppliers account. (b) Cash disbursement transaction occurs on the payment of cash on purchase of goods and services. Account involved in cash disbursement transactions are: cash, sundry creditors, and cash discount. (c) Purchase return transaction occurs on the return of the goods purchased to the suppliers. Accounts involved in purchase return transactions are: suppliers, and purchase return account.

An entity would combine all the documents related to a purchase transaction into a voucher packet because it contains all the information regarding a purchase transaction such as purchase requisition, purchase order, receiving report, and vendor invoice. It develops an easy and convenient access to all the relevant documents recorded in a single voucher packet.

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