CHAPTER 6: THE EXPENDITURE CYCLE Labor Distribution Summary

PART II: PAYROLL PROCESSING AND

- A summary of charges forwarded to the
FIXED ASSET PROCEDURES
general ledger function after cost
accounting allocates labor costs to the
WIP accounts
CONCEPTUAL PAYROLL SYSTEM
Payroll Register
Payroll Processing
- A listing of employees receiving payroll
- A special-case purchase processing system
showing gross pay, additional pay,
o Purchases labor rather than raw
deductions, and withholding taxes
material or finished goods for
resale Employee Payroll Records
o Payroll process differs per classes
- Payslip: a record of an employee’s
of employees (hourly paid,
payroll breakdown per cutoff
monthly paid, piece workers,
etc.) Paycheck
o Requires special accounting
- A negotiable instrument that is
procedures for employee presented to the bank for encashment of
deductions and withholdings for amount received as payroll
taxes that do not apply to trade
accounts Payroll Imprest Account
o Payroll activities are discrete - A cash fund account set aside for the
events in which disbursements to payment of payroll only
employees occur weekly,
biweekly, or monthly The clerk in payroll performs the following
o Writing check to employee tasks:
requires special control
1. Prepare payroll register showing
PAYROLL PROCESSING RECORDS gross pay, deductions, overtime pay,
and net pay
Personnel Action Form
2. Enter this information into the
- Identify employees authorized to employee records
receive a paycheck and are used to 3. Prepares employee paychecks
reflect changes in hourly pay rated, 4. Sends the paychecks to the distribute
payroll deductions, and job paycheck function
classification 5. Files the time cards, personnel action
- Prepared by the personnel department form, and the copy of the payroll
Job Tickets register

- A document that captures the time that

individual workers spend on each
Submitting time cards for nonexistent
production job
employees – form of payroll fraud
- Prepared by the production department
- To prevent this, many companies
Time Cards
use a paymaster to distribute the
- Capture the time the employee is at paychecks to employees
work - Paymaster – independent of the
- These are sent to the prepare payroll payroll process; not involved in
function for calculating the amount of payroll authorization or
employee’s paycheck preparation tasks
- Prepared by the production department
 PAYROLL PROCESSING CONTROLS

Transaction Authorization B. Paymaster

o The use on an independent
- Personnel Action Form describes the
paymaster to distribute checks
additions, deletions, and other changes
helps verify the existence of the
to the employee file and acts as n
employees
important authorization control to
C. Accounts Payable
ensure that only the time card of current
o The AP clerk verifies the accuracy
and valid employees are processed
of the payroll register before
Segregation of Duties creating a disbursement voucher
that transfer funds to the imprest
- The timekeeping function should be
account
separate from the personnel function
D. General ledger
- If timekeeping is provided with pay
o The general ledger department
rates, attendance or the pay rate may be
provides verification of the
manipulated to increase employee
payroll overall process by reconciling the
labor distribution summary and
Supervision the payroll disbursement voucher
- Sometimes employees will clock in for
another worker who is late or absent
- Supervisors should observe the time- PHYSICAL PAYROLL SYSTEM
keeping process and reconcile the time KEY TASKS IN PHYSICAL PAYROLL SYTEM
cards with actual attendance
1. Payroll authorization and hours worked
Accounting Records enter the payroll department form two
1. Time cards, job tickets, and different sources: personnel and
production
disbursement vouchers
2. Journal information, which comes from 2. The payroll department reconciles this
information, calculates the payroll, and
the labor distribution summary and the
payroll register distributes the paychecks to the
employees
3. Subsidiary ledger accounts, which
contain the employee records and 3. Cost accounting receives information
regarding the time spent on each job
various expense accounts
4. The general ledger accounts: payroll from production. This is used for
posting to WIP account
control, cash, and the payroll clearing
account 4. AP receives payroll summary
information from the payroll
Asset Controls department and authorizes the cash
- A dishonest individual can misrepresent disbursement department to deposit a
the number of hours worked on the time single check, in the amount of the total
cards and thus embezzle cash payroll, in a bank imprest account on
- Similarly, control over access to all which the payroll is drawn
journal, ledger, and source documents 5. The general ledger department
in the payroll system is important, as it reconciles summary information from
is in all expenditure cycle systems cost accounting and AP. Control
accounts are updated to reflect these
Independent Verification transactions
A. Verification of time Advantages Disadvantages
o Before sending time cards to Relatively cheaper Becomes more
payroll, the supervisor must difficult as the
verify their accuracy and sign number of
them employees grow
Cost saving More tedious to
 prepare 1. Process the acquisition of fixed assets as
Can readily start Does not allow real needed an in accordance with formal
payroll processing time reporting and management approval and procedures
analytics 2. Maintain adequate accounting records
Intimate Difficult error tracing of asset acquisition, cost, description,
understanding of the and physical location in the
process organization
Hassle
3. Maintain accurate depreciation records
for depreciable assets in accordance
COMPUTER-BASED PAYROLL SYSTEM with acceptable methods
4. Provide management with information
- Because payroll systems run
to help plan for future fixed asset
periodically, they are well suited to
investments
batch processing
5. Properly record the retirement and
Control Implications disposal of fixed assets

- This system promotes accounting THE LOGIC OF A FIXED ASSET SYSTEM

accuracy and reduces check-writing
Asset Acquisition
errors
- It does not significantly enhance - Usually begins with the departmental
operational efficiency; however, for manager (user) recognizing the need to
many types of organizations, this level obtain a new asset or replace an existing
of technology is adequate one – depending on the asset’s value

Reengineering the Payroll System Asset Maintenance

- Human Resource Management (HRM) - involves adjusting the fixed asset

system subsidiary account balances as the
o Captures and processes a wide assets (excluding and) depreciate over
range of personnel-related data, time or with usage
including employee benefits, - Common depreciation methods:
albor resource planning, a. Straight line
employee relations, employee b. Sum-of-the-years’ digits
skills, and personnel actions (pay c. Double-declining balance
rates, deductions) as well as d. Units of production
payroll - Depreciation calculation – transaction that
o Need to provide real-time access the fixed asset system must be designed
to personnel files for purposes of to anticipate internally when no external
direct inquiries and recording event (source document) triggers the
changes in employee status as action; an important record used to
they occur initiate this task is the depreciation
schedule

Asset Disposal
CONCEPTUAL FIXED ASSET SYSTEM
- When an asset has reached the end of its
Fixed Assets
useful life or when management decide
- Property, plant and equipment used in to dispose of it, the asset must be
the operation of a business removed form the fixed asset subsidiary
- Land, buildings, furniture, machinery, ledger
and motor vehicles

SPECIFIED OBJECTIVES OF THE FIXED

ASSET SYSTEM ARE TO:
 PHYSICAL FIXED ASSET SYSTEM Supervision Control

COMPUTER-BASED FIXED ASSET SYSTEM - Threat of misappropriation requires

constant management oversight:
- Process of tracking and maintaining an
- Theft: secure physical locations of assets
organization’s physical assets and
- Misuse: monitor on-the-job activities
equipment using a fixed asset software
- Asset types includes furniture, vehicles, Independent Verification
computers, and machinery
- Internal auditors should periodically
Asset Acquisition Procedures verify FAS Records
o The reasonableness of factors
- Asset receipts are digitally stores in the
used in decisions
system together with date about their
o Location and condition of the
useful lives, depreciation techniques,
fixed asset records in the
and other things
subsidiary ledger
a. Recording the asset in the fixed asset
o The programming logic for
subsidiary ledger
automatic calculations
b. Creation of the fixed asset status report
c. Preparation of the depreciation schedule

Asset Maintenance Procedures

- Includes:
o Calculating the current period’s
depreciation
o Updating the accumulated
depreciation and book value
fields in the subsidiary records
o Posting the total amount of
depreciation to the affected
general ledger accounts
o Recording the depreciation
transaction by adding a record to
the journal voucher file

Asset Disposal Procedures

- After the clerk removes the asset from

the record, the system automatically:
o Posts an adjusting entry to the
fixed asset control account in the
general ledger
o Records any loss or gain
associated with the disposal
o Prepares a journal voucher

FIXED ASSET CONTROL SYSTEM

Authorization Controls

- Should be forma and explicit because of

high costs of fixed assets
- Implementation of capital rationing