POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Chapter 6:
The Expenditure Cycle Part II: Payroll Processing and Fixed
Asset Procedure

A written report submitted in partial fulfillment of the requirements

in Accounting Information System

Submitted to Mr. Leandro Fua

College of Accountancy and Finance
Polytechnic University of the Philippines

BSA 2-1
Guinto, Guia Leighanne C.
Liwanagan, Joshua G.
Palado, Micah L.

June 13, 2020

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has grown and evolved its systems and technologies

into what businesses worldwide use today. Different organizations may have their
own unique systems and subscribe to a variety of payroll services, but the purpose
of payroll and its textbook definition is understood to be the same: it is the total
amount of wages paid by a company to its employees and other workers.

Before we go through the payroll system, let's take a look to a brief history
of payroll processing according to 3rd Arm Admin (2018).

14th Century Bookkeeping

It was around the 14th and 15th century when business owners realized that
bookkeeping and accounting were essential for
creating a successful business. “Tracking the
books” used to mean keeping meticulous records
of expenses and sales. Slowly, bookkeeping
meant incorporating all business finances –
including keeping track of payroll, or how much
they paid their employees. Tax-paying also
started becoming a company responsibility as tax
laws increased.
20th Century Business Payrolls

The practice continued to evolve, becoming

a standalone skill separate from bookkeeping.
During this time, businesses started outsourcing
payroll management. However, payroll remained a
manual system due to the lack of available
technology until the latter end of the century.

In the late 20th century, around the 70s and

80s, the creation of automated payroll systems and
payroll companies was brought about due to a
couple of reasons. Firstly, human error was playing too big of a role in the process,
and secondly, technology was evolving with the birth of computer science. Since
then, payroll management became easier, repetitive, and scalable, revolutionizing
the outsourcing industry. It was only in the 90s when payroll outsourcing truly
soared as an independent service that the industry began providing transparent
payroll management, benefiting both business and employee.
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21st Century Payroll Solutions

Today, payroll as we know it

has become a more personalized
service designed to meet unique
business needs. Payroll companies
now generally provide
bookkeeping, administration or HR
services as part of their services
package to offload time-consuming
administration work, freeing
employees from demanding paperwork. This allows organizations to focus their
attention on growing their business and maximizing profits.

Moving on, The Conceptual Payroll System Payroll processing is actually

a special-case purchases system in which the organization purchases labor rather
than raw materials or finished goods for resale. The nature of payroll processing,
however, creates the need for specialized procedures, for the following reasons:
1. A firm can design general purchasing and disbursement procedures that apply
to all vendors and inventory items. Payroll procedures, however, differ greatly
among classes of employees. For example, different procedures are needed for
hourly employees, salaried employees, piece workers, and commissioned
employees. Also, payroll processing requires special accounting procedures for
employee deductions and withholdings for taxes that do not apply to trade
accounts.
2. General expenditure activities constitute a relatively steady stream of
purchasing and disbursing transactions. Business organizations thus design
purchasing systems to deal with their normal level of activity. Payroll activities, on
the other hand, are discrete events in which disbursements to employees occur
weekly, biweekly, or monthly. The task of periodically preparing large numbers of
payroll checks in addition to the normal trade account checks can overload the
general purchasing and cash disbursements system.
3. Writing checks to employees requires special controls. Combining payroll and
trade transactions can encourage payroll fraud.
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In the Philippines there are several things to consider in having effective

payroll system and according to Rayan Ramos of JustPayroll Team (2008) these
are the things to get started:
1. Getting registered- registering to different government agency like Bureau
of Internal Revenue (BIR), Social Security System (SSS), Philippine Health
Insurance Corporation (PhilHealth) and Home Development Mutual Fund
(HDMF) is a vital part in knowing your registration number as an employer
(from BIR) and the respective number for mandatory contributions of your
employees (from SSS, Philhealth, Pag-IBIG or HDMF).

2. Reading Philippine Labor Code- having enough

knowledge about labor code can prevent you from
being penalized. You can identity what you should
and should not do as an employer. Knowing the
rights of your employees can mitigate problematic
situation.
3. Setting Policies- the policies must conform to the
labor code. The company should make their own
payroll policies in terms of regular work hours,
overtime, allowances, benefits, leaves, breaks,
tardiness, absences and holidays. After making
these policies it should be communicated and be
clearly explained to employees and getting their feedback about it, whether
they’re on the same page or not.
4. Building Database and Updating Constantly- the company should keep
employee records for more accurate payroll calculations. It is not only based
on company's judgement, but it is required by law. The basic information
from employees are name, birthdate, gender, address, tax status, name and
number of dependents, SSS number, TIN, PhilHealth number and Pag-ibig
number. The employee records must be updated. The Philippine Labor
Regulations require the yearly submission of updated employee records.
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Employers must assist new employees in acquiring their identification

numbers for SSS, PhilHealth, Pag-Ibig and BIR.
5. Determining Payroll Frequency and Method- payroll can be done weekly, bi-
weekly, bi-monthly or monthly.

The frequency of payment corresponds to how many times you have

to do payroll process. Employers can pay through cash, checks and
electronic transfers. Electronic transfer is the most widely used nowadays.
6. Learning the payroll process- this involves having extensive knowledge
about Philippine Labor Laws and computation for salaries, withholding
taxes, statutory deductions, overtime rates, holiday pay, absences,
tardiness and benefits. The employer needs to submit report to government
entity such as R3 form to SSS (monthly), RF1 form to PhilHealth (quarterly)
and 1604-CF form to BIR (annually).
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7. Choosing between Manual or Software or Outsourcing- Manual Payroll

process is basically calculating payroll outputs with a more hands-on approach
(will be discussed further). Using software is what we called payroll system.
This is an automation of payroll process. While outsourcing is getting your
payroll process done by payroll outsourcing company. In this, you just need to
submit information to the company, wait for their calculations and approve it.

Moving on, the diagram below shows the general task of the payroll system
specifically in a manufacturing firm. (Let the diagram below be Figure 1)
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Based on the diagram, the first thing to identify is whether the department is
production or personnel. To differentiate, Personnel Department is department
within an organization that is responsible for all employee services. This
department’s duties include attracting, maintaining and motivating employees
while ensuring an organization’s goals are met and values are upheld (Friend,
2018). The personnel department prepares and submits personnel action forms to
the prepare payroll function. These documents identify employees authorized to
receive a paycheck and are used to reflect changes in hourly pay rates, payroll
deductions, and job classification. For Missouri State University (2020) Personnel
action form (PAF) is used to
report appointments,
terminations, changes in
status, compensation of an
individual employee, etc. PAF
should be used each time
there is an action that should
be recorded in the individual’s
personnel file or that requires
payroll action.

Figure 6.2. Example of Personnel Action

Form on Increasing Employee’s Salary
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Figure 6.3. Sample Template of Personnel Action Form

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On the other hand, according to Bragg (2018) Production Department is a

group of functions within a business that is responsible for the manufacture of
goods.
Production employees prepare two types of time records: job tickets and
time cards. Job tickets capture the time that individual workers spend on each
production job. Cost accounting uses these documents to allocate direct labor
charges to work-in-process (WIP) accounts.

Figure 6.4. Job Ticket

Figure 6.5. Sample Template of Job Ticket

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Time cards capture the

time the employee is at work.
These are sent to the prepare
payroll function for calculating the
amount of the employee’s
paycheck. Each day at the
beginning of the shift, employees
place their time cards in a special
clock that records the time.
Typically, they clock out for lunch
and at the end of the shift. This
time card is the formal record of
daily attendance. At the end of
the week, the supervisor reviews,
signs, and sends the time cards
to the payroll department.

Figure 6.6. Time Card

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Figure 6.7. Example of Actual Timecard in the Philippines

From production departments' job ticket, update the WIP account. After cost
accounting allocates labor costs to the WIP accounts, the charges are summarized
in a labor distribution summary and forwarded to the general ledger function.
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The payroll department receives pay rate and withholding data from the
personnel department and hours worked data from the production department. A
clerk in payroll then performs the following tasks:

1. Prepares the payroll register

showing gross pay,
deductions, overtime pay,
and net pay.

Figure 6.8. Payroll Register

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Figure 6.9. Another example of payroll register

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2. Enters this information into the employee payroll records.

Figure 6.10. Employee Payroll Record Figure 6.11. Template for Individual
Payroll Record
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3. Prepares employee
paycheck

Figure 6.12. Employee’s Paycheck

Figure 6.13. Payslip or Paystub

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4.Sends the paychecks to the distribute paycheck function.

5.Files the time cards, personnel action form, and copy of the payroll register.

A form of payroll fraud involves

submitting timecards for nonexistent
employees. To prevent this any companies,
use a paymaster to distribute the paychecks
to employees. This individual is independent
of the payroll process—not involved in payroll
authorization or preparation tasks. If a valid
employee does not claim a paycheck, the pay
master returns the check to payroll. The
reason the check went unclaimed can then
be investigated.

The accounts payable (AP) clerk

reviews the payroll register for
correctness and prepares copies of a
cash disbursement voucher for the
amount of the payroll. The clerk records
the voucher in the voucher register and
submits the voucher packet (voucher
and payroll register) to cash
disbursements. A copy of the
disbursement voucher is sent to the
general ledger function.
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Upon receipt of the voucher packet, the cash disbursements function

prepares a single check for the entire amount of the payroll and deposits it in the
payroll imprest account. The employee paychecks are drawn on this account,
which is used only for payroll. Funds must be
transferred from the general cash account to
this imprest account before the pay checks can
be cashed. The clerk sends a copy of the
check along with the disbursement voucher
and the payroll register to the AP department,
where they are filed (not shown). Finally, a
journal voucher is prepared and sent to the
general ledger function.

The general ledger function receives the labor distribution summary from
cost accounting, the disbursement voucher from AP, and the journal voucher from
cash disbursements. With this information, the general ledger clerk makes the
following accounting entries:
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The debits and credits from these entries must equal. If they do not, there is
an error in the calculation of either labor distribution charges or payroll. When the
equality has been verified, the clerk files the voucher and labor distribution
summary.

Transaction Authorization
A form of payroll fraud involves submitting time
cards for employees who no longer work for the firm. To
prevent this, the personnel action form helps payroll keep
the employee records current. This document describes
additions, deletions, and other changes to the employee
file and acts as an important authorization control to
ensure that only the time cards of current and valid
employees are processed.
Segregation of Duties
The time-keeping function and the personnel function should be separated.
The personnel function provides payroll with pay rate information for authorized
hourly employees. Typically, an organization will offer a range of valid pay rates
based on experience, job classification, seniority, and merit. If the production (time-
keeping) department provided this information, an employee might submit a higher
rate and perpetrate a fraud.
For purposes of operational
efficiency, the payroll function
performs several tasks. Some of these
are in contradiction with basic internal
control objectives. For example, the
payroll function has both asset
custody (employee paychecks) and
record-keeping responsibility
(employee payroll records). This is the
equivalent in the general purchases system of assigning AP and cash
disbursement responsibility to the same person. Segregating key aspects of the
payroll transaction between AP and cash disbursement functions returns control
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to the process. AP reviews the work done by payroll (payroll register) and approves
payment. Cash disbursements then writes the check to cover the total payroll.
None of the employee paychecks is a negotiable instrument until the payroll check
is deposited into the imprest account.
Supervision
Sometimes employees will clock in for another
worker who is late or absent. Supervisors should observe
the time-keeping process and reconcile the time cards
with actual attendance.
Accounting Records
The audit trail for payroll includes the following
documents:
1. Time cards, job tickets, and disbursement
vouchers.
2. Journal information, which comes from the
labor distribution summary and the payroll
register.
3. Subsidiary ledger accounts, which contain
the employee records and various expense accounts.
4. The general ledger accounts: payroll control, cash, and the payroll clearing
(imprest) account.
Access Controls
The assets associated with the payroll system are
labor and cash. Both can be misappropriated through
improper access to accounting records. A dishonest
individual can misrepresent the number of hours worked
on the time cards and thus embezzle cash. Similarly,
control over access to all journals, ledgers, and source
documents in the payroll system is important, as it is in all
expenditure cycle systems.
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Independent Verification
The following are examples of independent verification controls in the payroll
system:
1. Verification of time. Before sending time cards to
payroll, the supervisor must verify their accuracy and
sign them.
2. Paymaster. The use of an independent paymaster
to distribute checks (rather than the normal
supervisor) helps verify the existence of the
employees. The supervisor may be party to a payroll
fraud by pretending to distribute paychecks to
nonexistent employees.
3. Accounts payable. The AP clerk verifies the
accuracy of the payroll register before creating a
disbursement voucher that transfers funds to the
imprest account.
4. General ledger. The general ledger department provides verification of the
overall process by reconciling the labor distribution summary and the payroll
disbursement voucher.

In addition, Duval (2018) provided guidelines on how to effectively conduct

payroll audit. Since, payroll managers keep track of a lot of numbers going in and
out of an organization, it’s important to check, about once a quarter, that everything
adds up as it should. As a good record keeping practice, payroll audit procedures
can help:

• maintain accuracy and compliance.

• identify any potential issues or problems.
• strengthen your financial controls.
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Guidelines for effective payroll audit:

• Verify Pay Rate

To start off, confirm that the pay rate listed in the system is correct for each
employee in your payroll records. Typos happens, so double check that an extra
0 didn’t get added or left off of a payment. Pay rates change. Employees get
promotions, raises, and bonuses. Be sure everything is accurate for the specific
pay period.

• Compare pay rates to time and attendance record

In this step, check overtime hours, sick days, and vacation time. Be sure
you’ve classified employees correctly to determine overtime pay eligibility. Confirm
proper pay rate and eligibility for paid time off like sick days and vacation time.
Review anything a manager may have overlooked that could result in overtimes
hours exceeding the payroll budget.

• Check independent contractors and vendor status

If your company utilizes a contingent workforce or relies on vendors for

certain goods and services, you want to confirm the status of the contracts for the
pay period. You don’t want to pay for services you’re not using! This is also a good
time to evaluate your relationship with your independent contractor to be sure
they’re still operating under the correct classification.

• Validate bank reconciliation for the payroll account

Compare your bank account with internal ledgers. Be sure the balances
align and all checks cleared for the amount they were issued.
• Review payroll tax submissions
This includes social security, federal and state unemployment taxes, and
medicare/medicaid taxes. Reconcile the expenses involved with payroll taxes by
comparing your tax remittance reports against your own payroll system reports.
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is defined by
Hitendra Rathore (2019) as a process wherein firms are not
required to use any system or software in doing their payroll.
Instead of having it automated, the entity would likely hire a
team of professionals to do every accounting and payroll
tasks by hand. It depends entirely on human effort. This
would even include monitoring attendance data wherein employees fill out their
time sheets or punch a time clock with blank time cards. This would be done
manually including wages and deductions. Also, because everything is by hand, it
uses paychecks for direct deposit is not possible.

The diagram above shows the procedure under the manual payroll system.
First, production employees would fill out two forms which are the job tickets (time
spent by worker on each production job) and time cards (total time worked each
pay period for payroll calculations). Payroll authorization should take place and
information both from personnel such as action forms and time cards and
production must enter the payroll department. By this time, payroll department
would reconcile the information gathered, calculate the payroll and distribute
paychecks to employees. On the other hand, cost accounting department would
use job tickets to allocate labor to Work In Process accounts. It would
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besummarized in a labor distribution summary to be forwarded to general ledger
department. After payroll register is done, a copy would be given to Accounts
Payable department. When received, it would prepare a cash disbursement
voucher for the total amount of payroll and send copies to Cash Disbursements
and General Ledger Department. Cash Disbursement dept. would review and sign
the paycheck and forward them to a paymaster for distribution to the employees
and as well as write check for the payroll and deposit it into the payroll imprest
account.

The following are the journal entries made by the General Ledger Department:
➢ From the labor distribution summary

Work in Process - Direct Labor XXX

Factory Overhead - Indirect Labor XXX
Wages Payable XXX

➢ From the distribution voucher

Wages Payable XXX

Cash XXX
Withholding tax payable XXX

ADVANTAGES OF MANUAL PAYROLL SYSTEM

• Less costly
• No danger of losing data in a computer
DISADVANTAGES OF MANUAL PAYROLL SYSTEM
• Time consuming
• High possibility of human error
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In today’s time, firms are already using computerized payroll system

because it is more efficient to use especially for large companies. According to
John Papiewski (n.d), automated payroll system is comprised of a set of software
programs which can automate almost all the steps of the payroll process and
requires only minimal human intervention. The programs contain formulas that
take the input data, such as hours worked and pay rates, and compute the gross
and net pay amounts. In some instances, such software could calculate tax and
statutory deductions based on the applicable region. Moreover, it stores employee
data, such as names, addresses, social security numbers, pay rates and
withholding allowances of each person. Many payroll systems perform accounting
functions, such as preparing general ledger entries and documents used for tax
purposes.

Payroll systems run periodically. With this, they are well suited to batch
processing. The data processing department receives hard copy of the personnel
action forms, job tickets, and time cards, which it converts to digital files. Batch
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computer programs perform the check writing, detailed record keeping, and
general ledger functions.

1. Integrated payroll management. Payroll, accounting, and HRM have

overlapping processes. Thus, often, payroll management is integrated as a
module in accounting software, HRM, or an organization-wide business system
like ERP. It can be a standard feature or separately charged as an add-on.
Integrated payroll management covers core tasks like payroll processing,
income tax calculations, and paycheck printing.
2. Dedicated payroll management. These are standalone apps that go beyond
core features with specialized functions as time-tracking and
attendance, customized reporting, benefits administration, and even a tax
planner. A good dedicated payroll app should easily integrate with other HRM
and accounting systems. This type of payroll system is popular among payroll
services and small businesses.

1. GUSTO

It is a standalone
payroll software built
for the small business
owner. The solution
comes with benefits
and HR functions like
employee onboarding,
time-off tracking, and
document
management.

Furthermore, it
helps users automate
payment, calculation,
and submission of a
company’s payroll
taxes for all
government levels.
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2. BAMBOOHR

It is the definition of a robust Human Resource Information System-

integrated payroll management. It has a flexible core system and pricing model
packaged with custom features, which allow users to set fields, tables, and tabs,
create user groups and integrate with related systems like applicant tracking and
payroll. It is said to cater to small and medium companies.

3. ONPAY

It is a simple-to-use yet powerful payroll software for small and medium-sized

businesses. This involves solution that can calculate federal and state payroll
taxes, make tax payments, and file tax forms correctly. Also, the vendor is
confident of their accuracy and will take responsibility for any mistakes in the tax
filing. On Pay securely stores pertinent information, manages payrolls quickly, and
automates certain tasks and operations.
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4. XERO

It is an accounting-integrated payroll management designed for small

business that need to integrate payroll with online accounting. It could be an
alternative for BambooHR that includes pension and finance management, as well
as core accounting, inventory, bank reconciliation, and purchase orders.
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5. WAVE

It is a free small business online accounting with professionally designed

invoices, estimates, and receipts. The solution offers credit card payments,
income, and expense tracking and deposit and pay stub payroll. It could be an
alternative for Xero.

6. ULTIPRO

It is an HCM-integrated payroll management with payroll administration, tax

management, and compliant features. It features advanced underlying
technologies like artificial intelligence and machine learning to personalize system
activities. It could be an alternative for Wave.
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Advantages of Payroll Software

Usage of payroll software allows firms to:
• work out payroll calculations and deductions quicker
• generate accurate payslips
• calculate bonuses, expenses, holiday pay, etc with minimum effort
• automate certain tasks, such as year-end reporting
• reduce the burden of compliance
• remove the need to understand complex tax legislation
• store data such as payslips and annual reports in a secure, easily
accessible system
Disadvantages of Payroll Software
Potential problems may arise such as:
• data security, loss or theft
• cyber security and fraud
• information access, quality and control
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For moderate-sized and large organizations, payroll processing is often

integrated within the human resource management (HRM) system.
IT can process a wide range of personnel-related data, including:
1. Employee benefits
2. Labor resource planning
3. Employee skills and training
4. Pay rates, deductions, and pay checks
5. Evaluations
HRM systems need to provide real-time access to personnel files for
purposes of direct inquiries and recording changes in employee status as they
occur.
Reengineered HRM differs from simple automated system in three ways:
1. Operations depts. transmit transactions to data processing via terminals
2. Direct access files are used for storage
3. Many processes are performed real time
4. Real-time access to personnel files required for direct inquiries

▪ Personnel

Changes to the employee file in real time are reflected by the personnel
department via terminals. These changes include additions of new employees,
deletions of terminated employees, changes in dependents, changes in
withholding, and changes in job status (pay rate).

▪ Cost Accounting

The cost accounting department enters job cost data (real time or daily) to
create the labor usage file.

▪ Time-Keeping

Attendance file are being monitored.

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▪ Data Processing
It still uses batch processing.

Labor costs are

distributed to various
WIP, overhead, and 01
expense accounts.

An online labor
distribution summary file
is created. Copies of the
02 file are sent to the cost
accounting and general
An online payroll register ledger departments.
is created from the 2016
attendance file and the
employee file. Copies of
the files are sent to the
AP and cash 03
disbursements
departments. The employee records file is
updated. Payroll checks are
prepared and signed. They
are sent to the treasurer for
04 review and reconciliation with
the payroll register. The
paychecks are then
distributed to the employees.
The disbursement voucher file is
updated. The check and a hard
copy of the disbursement
voucher are sent to cash 05
disbursements. One copy of the
voucher is sent to the general
ledger department, and the final At the end of processing,
copy is sent to AP. the system retrieves the
labor distribution
06 summary file and the
disbursements voucher
file and updates the
general ledger file.
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THE CONCEPTUAL FIXED ASSET SYSTEM

Fixed assets are the property, plant, and
equipment used in the operation of a business.
These are relatively permanent items that
often collectively represent the largest financial
investment by the organization. Fixed assets
are anything purchased for long-term use,
more than a year, and can include everything
from computer, to furniture, printers,
machinery, tools, vehicles, buildings, and land.
It’s because of that long-term usage that
business owners need a method to properly
manage their assets. While fixed asset
software of the past typically utilized spreadsheets, newer application and
processing systems today allow business owners to utilize bar code technology to
manage assets that are used off and depreciation. These application and
management system also handle standard depreciation calculation using common
depreciation methods such as Straight-Line, Double-Declining Balance, and Sum-
of-the-Years’ Digits, and Units of Production, with businesses able to choose the
depreciation method that is best suited for the type of assets they currently own.
Specific objectives of the fixed asset system
1. Process the acquisition of fixed assets as needed in accordance with
formal management approval and procedures.
2. Maintain adequate accounting records of asset acquisition, cost,
depreciation, and physical location in the organization
3. Maintain accurate depreciation records for depreciable assets in
accordance with acceptable methods.
4. Provide management with information to help plan for future fixed assets
investments.
5. Properly record the retirement and disposal of fixed assets
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Difference Between Expenditure Cycle and Fixed Asset System

1. The expenditure cycle processes routine acquisitions of raw material and
finished goods inventories. The fixed asset system processes nonroutine
transactions for a wider group of users in the organization
2. In expenditure cycle, the organizations usually treat inventory acquisitions
as an expense of the current period, while in fixed asset system, they
capitalize fixed assets that yield benefits for multiple periods. In other words,
fixed asset system includes cost allocation and matching procedures that
are not part of routine procedures.

THE LOGIC OF A FIXED ASSET SYSTEM

The following illustration shows the logic of fixed asset system.
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Three categories of tasks

1. Asset Acquisition
Asset acquisition usually begins with the departmental manager
(user) recognizing the need to obtain a new asset or replace an existing one.
Authorization and approval procedures over the transaction will depend on
the asset’s value. Fixed assets are acquired for the purpose of producing or
supplying goods or services for use of the company of for leasing to third
parties. The term fixed indicates that these assets will not be used up or sold
in the accounting year.
The fixed asset acquisition task is similar to the expenditure cycle
procedures with two noteworthy differences. First the receiving department
delivers the asset into the custody of the user/manager rather than a central
store or warehouse. Second, the fixed asset department, not inventory
control, performs the record-keeping function

2. Asset Maintenance
Asset maintenance involves adjusting the fixed asset subsidiary
account balances as the assets (excluding land) depreciate over time or with
usage. It involves adjusting asset accounts to reflect the cost of physical
improvements that increase the asset’s value or extend its useful life.
Depreciation schedule is an important record used to initiate depreciation
schedule. A depreciation schedule shows when and how much depreciation
to record. It also shows when to stop taking depreciation on fully depreciated
assets. This system must promote accountability by keeping track of the
physical location of each asset.
3. Asset Disposal.
It begins when the responsible manager issues a request to dispose
of the asset. Like any other transaction, the disposal of an asset requires
proper approval. The disposal options open to the firm are to sell, scrap,
donate, or retire the asset in place. A disposal report describing the final
disposition of the asset is sent to the fixed asset accounting department to
authorize its removal from the ledger
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

THE PHYSICAL FIXED ASSET SYSTEM

Computer-Based Fixed Asset System
Computer-based fixed asset system demonstrates real-time processing. In
the illustration, it shows three procedures: Asset acquisition procedure, Asset
maintenance and Disposal procedure.
The fixed asset system automatically updates the fixed asset control
account in the general ledger and prepares journal vouchers for the general ledger
department as evidence of the entry. It also produces reports for accounting
management. The system prepares a depreciation schedule for each asset when
its acquisition is originally recorded. The schedule is stored on computer disk to
permit future depreciation calculations.

Figure. Computer Based fixed asset system

 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Acquisition Procedures
The process begins when the fixed asset accounting clerk receives a
receiving report and a cash disbursement voucher. These documents provide
evidence that the firm has physically received the asset and show its cost. From
the computer terminal, a clerk creates a record of the asset in the fixed asset
subsidiary ledger.

Asset Maintenance
Specific task:
a. calculating the current period’s depreciation,
b. updating the accumulated depreciation and book value fields in the
subsidiary records,
c. posting the total amount of depreciation to the affected general ledger
accounts (depreciation expense and accumulated depreciation),
d. recording the depreciation transaction by adding a record to the journal
voucher file.
e. Finally, a fixed asset depreciation report, is sent to the fixed asset
department for review.

Figure. FIXED ASSET DEPRECIATION REPORT

 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Disposal Procedure
The disposal report formally authorizes the fixed asset department to
remove from the ledger an asset disposed of by the user department. A fixed asset
status report containing details of the deletion is sent to the fixed asset department
for review.

Figure. Fixed asset Report

Controlling the Fixed Asset System

Three areas of principal difference between fixed asset system and
expenditure cycle
a. Authorization Controls
Because fixed asset acquisitions should be formal and explicitly
authorized, each transaction should be initiated by a written request from
the user or department.

b. Supervision Controls
Supervisors must ensure that fixed assets are being used in
accordance with the organization’s policies and business practices.

c. Independent Verification Controls

 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Periodically, the internal auditor should review the asset acquisition
and approval procedures to determine the reasonableness of factors used
in the analysis. The internal auditor should verify the location, condition, and
fair value of the organization’s fixed assets against the fixed asset records
in the subsidiary ledger. In addition, the automatic depreciation charges
calculated by the fixed asset system should be reviewed and verified for
accuracy and completeness.
 POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

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