Purchasing for the Manufacturing Business

Accounting for the business which manufactures its own product is a much larger problem than that for the concern which limits its activity to purchase and sale of a stock-in-trade. To the activities of a trading concern the manufacturing business adds those of the factory. Not only must more property, and a larger variety, be kept account of and handled so as to get the most efficient return therefrom, but also in the handling and operation of this property a somewhat distinct type of expenses is incurred. The problems of financial and factory management and control are different and more complicated than those of the trading business. The period between the expenditure of funds for the purchase of materials and the payment of expenses and the receipt of money from the sale of the finished product is much longer. More working capital must therefore be provided and its rate of turnover is less. A larger element of risk enters in. Raw materials must be worked and fashioned, machinery must be employed, a different class of labor must usually be handled, perhaps will have to be trained—these are problems calling for a special type of management for the manufacturing end of the business.

The accounting department must be organized to serve these additional demands and complexities of management and to give the needed information. The amount and cost of the materials consumed in making the product, the labor cost expended on it, and the various items of factory expense incurred, during one period as compared with the same items for previous periods—all must be kept under constant review if successful operation is to be secured.

Expansion of the Purchase Journal

To make this information available as soon as the transactions giving rise to it are entered into, a different method of gathering the information becomes necessary. Because of the fact that the purchase journal is limited to the record of purchases of stock-in-trade, and that information in regard to expenses incurred is not usually brought on the books until payment of them is made, not only do the books fail to give the service which a management has a right to expect of them but they fail to reflect many liabilities at the time they are assumed. Thus a new type of record is needed.

This has led to an extension or expansion of the purchase journal. The way in which this journal can be used so as to analyze purchases of stock-in-trade on a departmental basis has been explained and illustrated in Volume I. This new use of the purchase journal is merely an extension of the principle of analysis there developed. Instead of limiting it to a record of transactions involving purchases of stock-in-trade, every purchase transaction, whether of assets, supplies, or of service of any kind, finds this its place of first record. By introducing sufficient columns, as detailed an analysis of all the purchasing activities of the business can be secured as may be desirable. Furthermore, entry here being made at the time of the purchase rather than at the time of payment for the purchase, the books make available a mass of valuable data needed for purposes of management much sooner than it becomes available under the former restricted use of the purchase journal.

Development of Voucher System

Had the evolution of this record stopped here, the resulting gain would have been secured at high cost. The entry of all expense purchases in the purchase journal creates the necessity of opening accounts on the ledger with numerous creditors for small purchases, as well as the more important items, both to show the liability incurred and to provide a means of canceling it when payment is made. In large corporations, where oftentimes the policy of securing bids on all purchases is followed, resulting in a constant changing of firms from whom purchases are made and no regularly established trade with any of them, the burden of handling the creditors ledger becomes an increasingly heavy one with little or no gain in desirable information furnished by it. Accordingly, a further development took place which eliminated the necessity of opening regular accounts with every creditor, but instead made every transaction, whether one or many were entered into with the same individual, independent of all others. This makes possible the showing of the settlement of that transaction in the place where its original record was made, without opening up a ledger account for it. This use of the purchase journal with some slight additions has given rise to the so-called “voucher system” of handling purchases.

Definition and Description of Voucher

In a broad sense, a voucher is a statement which certifies, i.e., vouches for, the correctness of a transaction. As used in the restricted sense to which it is limited under the voucher system, it is a more or less formal document which shows a receipt for a particular bill of items. As distinguished from a receipt in general, this latter term is applied to all acknowledgments of money paid whether or not for a particular bill; whereas the essence of voucher accounting requires receipts for particular bills. At law a voucher has no more weight than an ordinary receipt, and a signed receipt is only prima facie evidence, capable of refutation, though the burden of proof of non-payment is placed on the complainant.

A formal voucher must therefore provide for a statement of the bill of which payment is being made and a place for acknowledgment of receipt of payment by the payee. Usually provision is made also for: (1) certification of the correctness of the bill by properly authorized house employee and its approval for payment; and (2) a proper distribution on the accounting records of the payments authorized, i.e., an official determination of the debit and credit entries to be made on the books.

A form of voucher is shown on pages 30, 31. On the face of the form provision is made for (1) detailed statement of bill; (2) house approval of same; and (3) receipt form to be signed by payee. On the reverse side of the voucher the distribution of the charges is provided for. This is the bookkeeper’s authorization for making the indicated entries on his books. The form is so devised that, when doubled, it is of a convenient size for filing in a vertical file.

Operation of Voucher System

When the invoice covering any purchase is received, it is held till the commodities bought arrive. After inspection and acceptance of the goods, a voucher is made out in duplicate on which is written a copy of the invoice, with the cash discount, if any, shown deducted. Vouchers are given consecutive numbering just like checks. If immediate payment is to be made, the voucher will be “approved” and check drawn for the amount. The voucher with check attached is sent to the creditor with a request that he receipt the voucher and return it. A creditor is not usually particularly interested in helping another concern keep its books and the result is that a large number of vouchers find their way into the creditor’s waste basket. It is here that the duplicate copy retained in the files serves to keep the file of vouchers complete, though it does not, of course, constitute a receipt for the payment.

Sometimes before sending the original voucher, the distribution of the charges is made on it, and it is used as the basis of the bookkeeper’s entries. An objection to this method is frequently made that the creditor is thus given some insight into the business and perhaps a more intimate view of it than may be desirable. Where such is the case, only the office copy of the voucher shows the distribution and the book entries are made from it. Both may be filed together when the original is returned, or the one may be filed numerically according to voucher numbers, the other alphabetically according to creditors’ names and so serve as an index to the numerical file.

In some concerns the canceled checks when returned by the bank are filed with their respective vouchers; in others, they are filed separately in their own sequence. Inasmuch as each voucher also carries its check number, cross-reference is easy.

Voucher Check

The difficulty referred to above in securing prompt return of receipted vouchers has led to the introduction of a combined voucher and check called a “voucher check.” The indorsement on the check, which is necessary for its collection, serves at the same time as a receipt of the bill. All vouchers thus ultimately find their way back through the bank. The legality of the indorsement serving also as an acceptance of the check in payment of the stated invoice has been thoroughly established, particularly when on the blank space for indorsement attention is drawn to the fact that such indorsement will constitute a receipt for the bill; or where the face of the check states that it is full payment for the invoices covered by it.

Two forms of voucher check are in use, the folded check and the single. Below are given illustrations of both. If such checks are not unduly large, banks do not object to handling them.

Because of lack of room on the voucher check, provision is not always made for showing the distribution of the charges. The single form of check can be used when a detailed statement of invoices is not desirable or when invoices carry but few items. Such a voucher check, but differing somewhat from the one shown, is frequently used for the payment of dividends to stockholders and does away with the need of a formal receipt or of signature in the dividend book.

Form of Voucher Register

The “Voucher Register,” or the “Accounts Payable Register,” as it is sometimes called, is the book of original entry in which the voucher and its distribution are recorded. This register is a journal so far as its scheme of debit and credit is concerned, but its record is not usually supplemented by a formal subsidiary ledger—though it may be—posting of it being limited to the general ledger. The register must provide columns for date, voucher number, name of creditor, explanation, amount, distribution, and payment. There are many different forms and rulings, the information desired never being quite the same in any two businesses, but a typical form of voucher register is shown on page 35.

Distribution of Vouchers

As soon as a purchase invoice has been approved, a voucher—sometimes called a voucher jacket where the original invoice itself is attached to it—is made for it, the distribution of the charges is authorized, and entry is made in the voucher register. All vouchers are numbered consecutively and entered in numerical sequence, which is usually also chronological sequence. The amount of the voucher is entered in the total column, Vouchers Payable or Accounts Payable, whatever the account title is on the general ledger. The next column, Purchase Discount, may or may not be merely a memorandum column, depending on the use made of it, as will be explained later.

From the Vouchers Payable column, distribution on the same line is made into the columns for the various accounts to be charged. To secure a complete distribution without waste of space, a Sundry Charges column is provided for entry in detail of all items of infrequent occurrence, each account to be charged being named in the explanation space to the right of this column. Following this comes the record of date and manner of payment, with a final column in which to extend at the end of the month all unpaid vouchers and so indicate the detail of the total outstanding liability. The voucher record is capable of almost indefinite expansion through the use of short-margin insert sheets. Provision can in this way be made for a large number of columns for analysis.

Posting of Summary Totals

At the end of the month, or oftener if desired, the voucher register is summarized and posted. Inasmuch as usually no subsidiary ledger is kept when the voucher system is in use, there is no day-to-day record on the ledger of the purchasing activities of the business. Accordingly, a complete double entry must be made by way of periodic summary. It was at one time thought desirable to make this summary entry through the general journal or, at any rate, by setting up a formal journal entry on the face of the voucher register. As the degree of analysis increased, the futility of such a procedure became apparent and now posting to the ledger accounts is made directly from column totals as shown in the illustration. The Sundry Charges column is posted in detail to the named accounts as indicated. Proof of distribution should always be secured by checking the total of the distributive column totals against the total of the Vouchers Payable column. In posting, the total of the Voucher Payable column is credited to its account, while the totals of the distributive columns are debited to their respective accounts.

Effect on Cash Book and Bank Account

The advantage of this periodic posting of expense column totals as compared with the detailed posting of such items from the cash book as required under the old method is apparent. The cash book is in this way relieved of all need of naming the account to be charged for each detailed entry, the proper charge having been made from the voucher register. If every transaction which will ultimately give rise to a disbursement of cash is vouchered and therefore recorded through the voucher register, there is really no need of a detailed entry of the checks on the cash book, for only their total is posted. It is perhaps more usual, however, to enter them in detail on the cash book. Entry here is, as always, chronologic, by date of payment.

Sometimes, to facilitate reconciliation with the bank account, the voucher checks are given a new series of numbers known as treasurer’s numbers when issued in payment of invoices. Where this is done, the cash book shows entry of all checks in the numerical sequence of treasurer’s numbers, just as entry in the voucher record is in the sequence of voucher numbers. Some checks are held before issue longer than others, due to different lengths of credit term, etc.; hence the need for this new series of numbers.

Payment of Vouchers

After a voucher has been made up and entered in the register, if payment is to be made immediately, it is passed for payment by the treasurer or other fiscal officer and the check is drawn and issued. Any cash discount offered is shown deducted on the face of the invoice and the check carries the net amount. Where payment is not immediate, but observance of the terms of credit is necessary to secure the discount, the voucher should be filed away in a tickler file which will automatically bring it up for attention at the proper time. The original invoice is placed in a temporary file, arranged alphabetically, until paid, when it may be removed and filed permanently with the paid voucher. Upon payment of the voucher, the check is entered among the cash disbursements and a notation is made in the payment column of the voucher register as to the date and manner of payment.

Voucher Index of Creditors

It has been stated that one of the essential features of the voucher system, as it is usually operated, is the dispensing with the formal creditors ledger. This is accomplished by treating every transaction as an independent unit, numbering it, and providing a place in the voucher register to indicate its payment, so that there is no need of a separate ledger to keep track of the cancellation of the liability. The voucher system fails, however, to give a record of volume of business done with each creditor. Furthermore, it is often desirable to make reference to past transactions with creditors. This would be very difficult without a definite knowledge of the voucher numbers under which account has been kept of the transactions with a particular creditor.

Accordingly, for the proper operation of the system an alphabetic index of creditors must be made up on which should be shown the voucher numbers relating to transactions with each creditor. This is usually of the card index type, each creditor being provided with a card on which is noted a list of the vouchers recording the business done with him. This voucher index, while not a ledger in the accepted sense, yet when operated in connection with the Payment column in the voucher register serves all the essential purposes of a creditors ledger, and the use of the “Unpaid Vouchers” column, as explained above, secures at the end of the month the detail of the summary account, Vouchers Payable, carried on the general ledger.

Control of Vouchers Payable

With the elimination of the detailed ledger record which served as a check on its controlling account on the general ledger, particular care must be exercised to see that the control account, Vouchers Payable, reflects the correct summary of all detailed liabilities. This is readily accomplished when every item that leads to a disbursement of cash is vouchered. Then the only postings to “Vouchers Payable” come, for their credits, from the total of Vouchers Payable column of the voucher register, and for their debits, from the total of Vouchers Payable column in the cash book.

Introduction of System

Some of the problems encountered in the operation of a voucher system will now be discussed, the first of which is the introduction of the system in a business where the old method of handling purchases is in use. The requirement here is the closing of the open accounts on the purchase ledger and their transfer to the voucher register. This may be accomplished in two ways—one of which requires a change in the controlling account, and the other of which does not. Under the first plan without formality, the accounts in the purchase ledger are balanced and closed by indicating in their explanation columns the transfer of the balance to the voucher register. As these accounts are entered on the voucher register, each of the items comprising the balance of an account should be given separate vouchers rather than entered under one voucher for the whole amount. This is particularly true where the different items are subject to different discount and credit terms, rendering it undesirable to pay them all at the same time. After entry on the voucher register, the amounts may be distributed to the Sundry column and charged to the controlling account, Accounts or Vouchers Payable, as the case may be. The register should now be totaled, i.e., the Vouchers Payable and Sundry columns should be added and the register ruled off. These totals, being to the credit and debit of the same account, may or may not be posted, as the balance of the controlling account is not affected. Under the second plan the register is left open, i.e., not totaled. In this way the credit to the Vouchers Payable account is included with the total to be posted at the end of the current month when the register is first summarized. This, of course, necessitates posting the corresponding debit of the amounts distributed to the Sundry column as explained above.

The new voucher system is now ready for use and current entries will be made as previously explained.

Purchase Returns and Allowances

The handling of purchase returns and allowances is awkward under the voucher system. If the goods can be inspected and accepted or adjustment secured when necessary, before the voucher for the transaction is made up, then the amount to be paid is always the amount of the voucher and no change need be made in the amounts entered and distributed on the register. Where this is done a Purchase Returns and Allowances Account is not required. This procedure, however, is not always possible, for a first inspection does not always show the true condition of goods. Adjustment of the general ledger accounts could be made by entry of the return or allowance through the general journal. That would not, however, leave any indication in the voucher register record of the fact that cancellation of the liability there shown was made by payment of a lesser amount than the one entered, and it is desirable that these two amounts be the same.

To accomplish this, entry of the allowance should be made, in small red ink figures on the upper part of the line just below the vouchers affected, entering in red the voucher number—the same as the voucher to which it applies—and the amount of the allowance, both in the Vouchers Payable column and the distributive columns affected by the allowance. These red ink items are, of course, deductions, the summary amounts of the various columns being net totals, i.e., the totals of regular items less the red figures; or two totals may be shown, one above the other, the regular and the red. Where both black and red totals are shown, both must be posted, the red as contras or offsets to their corresponding black postings. If desired, separate Purchase Returns and Allowances accounts may be opened.

An alternative method, requiring more work but handling the difficulty somewhat more neatly, cancels the original voucher by marking it paid and its check void, and issues in its stead a new one for the correct amount. The new voucher is handled regularly in the cash book, but in the register distribution is made to the Sundry column and charged to Vouchers Payable, as the purchase has already been charged from the original voucher. This charge to Vouchers Payable cancels the credit from the journal and allows the liability for the new amount to be shown in the total of the Vouchers Payable column of the register. The cancellation is best evidenced by entry in the general journal somewhat as follows:

Under this method postings to the Vouchers Payable account, instead of being limited in their origin to voucher register and cash book, will be made also from the general journal.

Partial Payments

A similarly awkward situation is met when it becomes necessary to make partial payments on a voucher. The whole system is built on the idea that each voucher is the unit according to which the record is kept. It, therefore, presupposes settlement in full of each voucher; otherwise, the efficient operation of the system is interfered with. Settlement in full is not always possible, however. Since provision is made in the register for but one line on which to show payment of the voucher, it is not possible to indicate partial payments in the allotted space, nor would such practice be desirable.

Hence, where partial payments are to be made, the original voucher must be canceled in full and two new vouchers issued in place of it—the one for the amount of the partial payment, which will thus cancel it, and the other for the unpaid balance, which will remain open until paid in full or till other partial payment is made. In the latter case the same procedure of cancellation and issuance in its stead of two vouchers must be repeated. This process of cancellation by the reissue of two new vouchers may be effected directly on the face of the voucher register by a full cross-reference between the old and the new, usually shown in the Manner of Payment column; or it may be done by formal entry on the general journal, which will then constitute the authority for the transaction. At the best, it is an awkward situation and where financial arrangements cannot be made so as to make partial payments unnecessary in large measure, the voucher system itself should be discarded as not adapted to the conditions of the business.

Handling of Notes Payable

Practice differs, under the voucher system, in the handling of notes payable. If a note is given or a draft accepted upon the purchase of goods, the liability for it will appear on the books only as a note liability, provided the purchase is recorded through some other medium than the voucher register. This medium might be the general journal or the notes payable journal. If, however, original entry of the purchase is made in the voucher register, liability for it is thereby created under the account title, Vouchers Payable. This must be shown canceled by the creation of a note liability in its place, by entry in general or notes payable journals. If the voucher check system is used, the check on the original voucher must be canceled by marking it “Void” or by running it through the bank with the day’s deposits. In either case for the sake of a complete record of check numbers, it should be entered among the cash disbursements. From all this it is evident that less work is entailed and just as complete a record made by entering the purchase originally in general or notes payable journal as suggested above.

In order to maintain proper control over the cash, when the note becomes due a check should be drawn for it rather than allow its payment to rest merely on the bank’s memo of charge against the account, where the note is made payable at the bank. If a voucher check system is in use, payment by check results in a momentary transfer of the liability from its status as a note liability to a vouchers payable—an open account—liability. Cancellation of the note is made by distribution of the voucher to the Sundry column of the register as a charge to Notes Payable; the voucher not being made or entered until the note falls due. Simultaneous entry of the check in the cash book cancels the voucher payable liability and completes the transaction.

If the note is given in cancellation of the open account which had been set up by previous entry in the voucher register, then the same procedure must be gone through, as was explained above in connection with the practice of invariably entering every purchase on the voucher register. If the note transactions are many, it would prove much less laborious to accept the bank’s memo of charge as adequate evidence of payment, this memo being given a treasurer’s number in proper sequence, where treasurer’s numbers are given to establish order of entry on the cash book. Cancellation of the notes payable liability is then posted from the cash book entry.

Cash Discount on Purchases

A final problem in connection with the voucher system concerns the treatment of cash discount on purchases. As discussed in Volume I, Chapter XXXVI, a cash discount is usually treated as a financial management item, though it is sometimes looked upon as a purchase department item. The handling of the voucher register so as to record properly the purchase discount will depend somewhat upon which theory of cash discount is adhered to. It is customary to carry a Purchase Discount column in the voucher register, although this is unnecessary if one is carried in the cash book. Where both cash book and voucher register are provided with discount columns, one is usually merely a memorandum carried for the sake of easy reference.

As regards the amount at which the liability under Vouchers Payable is carried on the books, we find two methods of making up the voucher and entering it on the register. This is in turn closely related to the financial policy as to the taking of discount. If it is an invariable rule of policy always to maintain a sufficient cash balance to take advantage of all discount offerings, there is nothing seriously wrong with the practice of making up the voucher and entering it for the net amount in the Vouchers Payable column; for if the policy is adhered to, no understatement of liabilities will result. If the policy is not strictly adhered to, constant adjustment will be necessary to make the books reflect the true liability.

A voucher entered net should have the discount shown in the Discount column and the gross amount in the distributive columns. Mathematical proof of the voucher register is secured by checking the sum of Vouchers Payable and Discount columns against the sum of the distributive columns. Here it is best to treat the Purchase Discount column total as an item to be posted, and the Discount column in the cash book as a memo. As regards the income from purchase discount, the effect of entering the voucher net is to bring onto the books the purchase discount income as soon as the voucher is entered. Purchase discount is not usually looked upon as earned until payment of the bill is made and thus the right to the discount established. This method then necessitates at the close of the fiscal period an adjustment of the difference between the Discount columns in voucher register and cash book, in order to defer to the next period the discount not yet earned on all vouchers unpaid at the close of the period. This may be accomplished by the usual method of deferring income, or by the following entry, on the theory that it is better for Vouchers Payable to carry the gross amount of liability, at the end of the period, at all events.

The entry must, of course, be reversed immediately at the opening of the new period—a procedure which makes this method of adjustment of doubtful value.

If there is any failure to take the discount, after the voucher has been entered net, it becomes necessary to make up and enter a supplementary voucher for the discount, with cross-reference between the original and the supplementary vouchers. The new voucher must be distributed to Sundry column as a charge to Purchase Discount. One of the few advantages of this method is that it makes possible reconciliation with the bank account by checking the canceled checks against the voucher register, which thus carries in its Vouchers Payable column the exact amount of the check and its entries are in the sequence of voucher numbers; whereas on the cash book voucher number sequence cannot be followed. Accordingly it is unnecessary to use treasurer’s numbers on the checks in order to secure sequence of numbers in the cash book.

The customary method, and one which usually proves most satisfactory, is to make up and enter the voucher for the gross amount, using the Discount column in the voucher register merely as a memo or not at all, posting the discounts, as earned, from the cash book and using a separate series of treasurer’s numbers when the checks are entered on the cash book.

Strict adherence to the theory of cash discount as a purchase department item would require making and entering the voucher net and distributing it net. The Discount column in the register might well be changed to a “Neglected Purchase Discounts” column into which would be distributed the supplementary voucher required when discounts are not taken. Under this theory, also, the voucher may be made up and entered gross, with the discount handled as a regular purchase discount item, and the net amount distributed to the other columns. The student should work out the manner of handling all the discount contingencies under this method.

Modifications of System

A regular purchase ledger is sometimes used with the voucher system. In such cases the voucher register becomes merely an analytic purchase journal and much of the advantage of numbering every transaction is lost. Accounts may also be set up merely as memos to indicate volume of business. The voucher index, as explained above, accomplishes this in a limited way.

A hybrid voucher system is sometimes met, a sort of half-hearted affair, which gives good results but does away with the essential idea of the voucher as being a receipted bill. Under it, a house voucher—so called because it never leaves the house—is made up and used as the basis of entry. The bill is paid by independent check, which when canceled is filed with the voucher. In all respects, except that the voucher is not sent with the check to be receipted, the system is operated as a regular voucher system. An advantage claimed is that in this way all information as to distribution of the charge or use of the purchased materials or services is kept strictly within the business itself. This is done at the sacrifice of securing a receipted bill.

Summary of Operation and Advantages

By way of summary, it may be stated that a fully efficient operation of the voucher system is comprised under the following routine:

• 1. A verification of invoices.
• 2. Making up and entering the vouchers.
• 3. Filing vouchers previous to payment.
• 4. Paying vouchers.
• 5. Filing paid vouchers.
• 6. Indexing vouchers.

Some of the advantages claimed for the voucher system are:

The chief disadvantages are:

It should always be borne in mind that any satisfactory method of account-keeping must be adapted to individual conditions. If efficient results are expected, a business man should beware of ready-to-wear accounting systems. There are conditions in which the voucher system gives excellent results. There are also conditions to which it is entirely unadaptable and inadequate.