Chapter 6

The Expenditure Cycle Part II:

Payroll Processing and Fixed Asset
Procedures

PAYROLL SYSTEM

 Personnel department. uses personnel action forms to:

 activate new employees
 change the pay rate of employees
 change marital status and/or number of
dependents
 terminate employees
 Production employees fill out two forms:
 job tickets - account for the time spent by the
worker on each production job
 time cards - used to capture the total time
worked each pay period for payroll calculations
 must be signed by a supervisor
 Cost Accounting department:
 uses the job tickets to allocate labor costs to WIP
accounts
 summarizes these charges in a labor distribution
summary which is forwarded to G/L
department.
 Payroll department receives personnel action forms and
time cards.
 Uses them to:
 prepare the payroll register
 enter the information into the employee payroll
records
 prepare paychecks
 send paychecks to Cash Disbursements and a
copy of the payroll register to Accounts Payable
 Accounts Payable department:
 prepares a cash disbursements voucher for the
total amount of the payroll
 sends copies to the Cash Disbursements and
G/L departments.
 Cash Disbursements department:
 reviews and signs the paychecks and forwards
them to a paymaster for distribution to the
employees
 writes a check for the payroll and deposits it into
the payroll imprest account
 G/L department. makes the following journal entries:

 From the Labor Distribution Summary

WIP (Direct Labor) DR
Factory Overhead (Indirect Labor) DR
Wages Payable CR

 From the Distribution Voucher

Wages Payable DR
Cash CR
Fed. Inc. Tax Withholding Payable CR
State Inc. Tax Withholding Payable CR
FICA Withholding Payable CR
Other Withholding Payables CR

 G/L department. makes a journal entry to transfer the

cash from the operating bank account to the payroll
imprest account:
Cash - Payroll Imprest Account DR
Cash - Operating Account CR
 Payroll Controls

 Transaction authorization - the personnel action form

helps prevent:
 terminated employees from receiving checks
 wage rates from being improperly changed for
current employees
 Segregation of Duties - timekeeping and personnel
functions should be separated
 Supervision - need to monitor employees to ensure they
are not “clocking in” for one another
 Accounting Records - audit trail includes:
 time cards
 job tickets
 disbursement vouchers
 labor distribution summary
 payroll register
 subsidiary ledger accounts
 general ledger accounts
 Access Controls - need to prevent employees from
having improper access to:
 accounting records, such as time cards which can
be altered
 unsigned checks
 Independent Verification:
 verification of time cards
 distribution of paychecks to authorized
employees
 verification of accuracy of payroll register by A/P
department.
 G/L department. reconciles the labor distribution
summary and the payroll disbursement voucher
 COMPUTER-BASED PAYROLL
SYSTEMS

 Payroll is well-suited to batch processing and sequential

files.
 Most employees on the master file receive
paychecks periodically.
 The computer program performs the detailed record-
keeping, check-writing, and general ledger functions.

Reengineered HRM Systems

 Payroll can be reengineered as a part of human resource

management (HRM).
 IT can process a wide range of personnel-related data,
including:
 employee benefits
 labor resource planning
 employee skills and training
 pay rates, deductions, and pay checks
 evaluations
Key Features of Reengineered HRM
 Personnel - can make changes to the employee file in
real time
 Cost Accounting - enters job cost data either daily or
in real time
 Timekeeping - enters the attendance file daily
 Data Processing - still uses batch processing and
prepares all reports, the checks, and updates the
general ledger
Reengineered HRM Systems differ from automated manual
and batch/sequential file systems because:
 operations departments. transmit transactions to data
processing via terminals
 direct access files are used for storage
 many processes are performed real time
 real-time access to personnel files required for direct
inquiries

THE FIXED ASSET SYSTEM (FAS)

 Fixed Assets - property, plant, and equipment used in the
operation of a business

Life of a Fixed Asset

1. Acquisition of asset.
2. Depreciation.
3. Subsequent expenditures.
4. Disposal of asset.
Objectives of FAS
 Acquire fixed assets in accordance with management
approval and procedures
 Maintain adequate accounting records of asset
acquisition, cost, description, and location
 Maintain depreciation records for depreciable assets in
accordance with acceptable method
 Provide management with information to help it plan
future fixed asset investments
 Properly record the retirement and disposal of fixed
assets

Asset Acquisition
 Begins when a department. manager determines that an old
fixed asset needs to be replaced or that a new fixed asset is
warranted
 A purchase requisition is filled out.
 May require an authorizing signature for items
over a pre-specified limit
 FAS department. performs record-keeping functions.

Asset Maintenance
 Involves adjusting FAS subsidiary account balances as
assets depreciate
 Depreciation calculations are internal transactions that the
FAS system bases upon a depreciation schedule.
 Physical improvements must also be recorded to increase
the subsidiary account balance and depreciation schedule.
Asset Disposal
 At the end of an asset’s useful life (or earlier disposition),
the asset must be removed from the records and
depreciation schedule
 Disposals require disposal request forms and disposal
reports as source documents.

Computer-Based Fixed Asset System—Acquisition

 Receipt of assets are digitally recorded in the system, along
with information such as its useful life, depreciation
methods, etc.
 Ledgers are automatically updated

Computer-Based Fixed Asset System—Maintenance

 Computerized FAS automatically:
 calculate current period’s depreciation
 update accumulated depreciation and book-value
fields in the subsidiary records
 post total depreciation to the affected general
ledger accounts
 record depreciation transactions by adding records
to the journal voucher file

Computer-Based Fixed Asset System—Disposal

 Computerized FAS automatically:
 post adjusting entries to the fixed asset control
account in the general ledger
 record losses or gains associated with the disposal
transaction
 prepare journal voucher records
 FAS Controls

 Authorization - should be formal and explicit because of

high cost of FAS:
 acquisitions
 changes in depreciation methods
 Supervision - threat of misappropriation requires constant
management oversight:
 theft - secure physical locations of assets
 misuse - monitor on-the-job activities
 Independent Verification - internal auditors should
periodically verify FAS records:
 the reasonableness of factors used in decisions
(useful life, discounts, budgeting model)
 location, condition, and fair value of the fixed asset
records in the subsidiary ledger
 the programming logic for automatic calculations
(depreciation)