Chapter 6

The Expenditure Cycle Part II:

Payroll Processing and Non
Current Asset Procedures
Objectives for Chapter 6
• Fundamental tasks of payroll and fixed asset processes
• Functional depts. of payroll and fixed asset activities and the flow of
transactions through the organization
• Documents, journals, and accounts needed for audit trails, record
maintenance, decision making, and financial reporting
• Exposures associated with payroll and fixed asset activities and the
controls that reduce these risks
• Operational features and the control implications of technology
used in payroll and fixed asset systems
DFD of Payroll Procedures
Manual Payroll System
• Personnel dept. uses personnel action
forms to:
• activate new employees
• change the pay rate of employees
• change marital status and/or number of
dependents
• terminate employees
Manual Payroll System
• 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
Manual Payroll System
• Cost Accounting dept:
• 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 dept.
Manual Payroll System
• Payroll dept 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
Manual Payroll System
• Accounts Payable dept:
• prepares a cash disbursements voucher
for the total amount of the payroll
• sends copies to the Cash Disbursements
and G/L depts.
Manual Payroll System
• Cash Disbursements dept:
• 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
 Manual Payroll System
• G/L dept. 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
Manual Payroll System
• G/L dept. 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 Procedures Flowchart
Payroll Controls
• Transaction authorization - the
personnel action form helps prevent:
• terminated employees from receiving
checks
• wage rates from being improperly changed
for current employees
Payroll Controls
• 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
Payroll Controls
• Accounting Records - audit trail includes:
• time cards
• job tickets
• disbursement vouchers
• labor distribution summary
• payroll register
• subsidiary ledger accounts
• general ledger accounts
Payroll Controls
• Access Controls - need to prevent
employees from having improper
access to:
• accounting records, such as time cards
which can be altered
• unsigned checks
Payroll Controls
• Independent Verification:
• verification of time cards
• distribution of paychecks to authorized
employees
• verification of accuracy of payroll register
by A/P dept.
• G/L dept. 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 depts. 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
Reengineering Payroll—Before (Batch)
Reengineering Payroll—After (Real-Time)
The Fixed Asset System (FAS)

• Fixed Assets - property, plant, and equipment

used in the operation of a business
 Life of a Fixed Asset
2. Depreciation.
1. Acquisition 4. Disposal
3. Subsequent
of asset. of asset.
expenditures.
Asset
cost $
Dec
line
in ass
et’s
ser
vice
pot
ent
ial
Cost Salvage
value
Time (useful life)
DFD of Fixed Asset System
Computer-
Based FAS
Flowchart
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 dept. 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 dept. 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
FAS Controls
• 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)