What is a purchase approval limit?

Definition

A purchase approval limit is the dollar threshold at which a purchase needs a higher level of sign-off. It is not an account on the Balance Sheet or a line on the Income Statement.

It is a threshold in the sign-off rules. Below the cap, a manager may say yes; above the cap, the same request must wait for the owner or another named person.

The limit applies to the buy, not to the later journal. Cash still moves only when the allowed purchase is received and paid.

Where it shows up

Balance Sheet: Related to nothing extra.

P&L: Related to nothing extra.

Cash flow: Related to nothing extra.

See also: Approval Workflow · Spend Policy · Internal Controls

You will not see a purchase approval limit as a line on the Balance Sheet. It does not sit in assets, liabilities, or equity.

You also will not see it on the Income Statement or the Statement of Cash Flows. Those reports show the purchases that already cleared the cap, not the cap itself.

In day-to-day books, you meet the limit on the request. A purchase requisition for $180 may stop at the manager, while a $640 request continues to the owner.

The limit does not post itself. It only decides whose name must be on the file before a purchase order is issued.

How it works

The owner writes a dollar cap next to each role. A manager might approve up to $500, and the owner might approve anything above that.

The cap is usually read against the total of the request, not against each line. Five $120 tools on one request are $600, so that file still goes up a level.

Some businesses set different caps by category. Bakery ingredients may have a higher cap than equipment, because ingredients are bought every week.

When a request is under the cap, the named person may sign and the buy may continue. When a request is over the cap, that person must send it to the next person instead of signing as the final yes.

The limit should be written down where employees can find it. A cap that lives only in the owner's head is easy to skip on a busy morning.

After the right person signs, the business may issue a purchase order or accept the invoice. Until then, accounts payable should not be paid for that buy.

If someone signs above their cap, the usual fix is to stop payment and send the file to the person who actually holds that dollar amount. The limit's job is to catch that overreach before cash leaves.

Example

A cafe manager may approve bakery orders up to $500. The owner must approve anything above that.

The baker requests $240 of flour. The manager signs, the cafe issues a purchase order, and the mill delivers.

The next day the baker requests a $720 oven shelf. That amount is over $500, so the manager cannot be the final yes.

The owner reviews the quote and signs. Only then may the cafe order the shelf.

No journal is made for the $500 cap itself. Cash leaves later, when the vendor is paid.

If the manager had signed the $720 shelf as the final yes, the owner would hold the payment. The limit's job is to send that file up a level before cash leaves.

Common mix-ups

A purchase approval limit is not a spend policy. The policy says what may be bought and what proof is required, while the limit is only the dollar cap that decides whose signature is enough.

A purchase approval limit is not a budget. A budget says how much the cafe plans to spend this month, while the limit says who may approve a given buy even if money is still left in the budget.

A purchase approval limit is not the same as a capitalization policy. A capitalization policy decides whether a buy is recorded as an asset instead of an expense, while the approval limit only decides who must sign.

Related terms

• Approval Workflow: The routing of a request or bill through the people who must sign off.
• Spend Policy: The written rules for what employees may buy and how it must be approved.
• Purchase Requisition: An internal request to buy something, submitted before a purchase order is issued.
• Segregation Of Duties: Splitting recording, approving, and payment tasks so no one person controls a transaction end to end.
• Internal Controls: The procedures that keep the books accurate and assets protected.
• Purchase Order: The document authorizing a purchase from a vendor at agreed terms.
• Capitalization Policy: The written dollar threshold and rules for recording a purchase as an asset instead of an expense.
• Corporate Card Program: Company-issued cards used for employee purchasing under set rules.