Accounting Information Systems, 6th

edition
James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
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
PREPARE PERSONNEL ACTION
FORMS
Personnel department prepares
and submits personnel action
forms to the prepare payroll
function (Payroll department).
Personnel action forms
identify employees authorized to receive a
paycheck
used to reflect changes in hourly pay rates,
payroll deductions, and job classification.
PRODUCTION DEPARTMENT
PREPARES TIME RECORD
Production employees prepare two types of time
records:
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.

Time cards
 capture the time the employee is at work.
 Formal record of daily attendance.

 These are sent to the prepare payroll function for

calculating the amount of the employee’s paycheck.

UPDATE WIP
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.
Prepare Payroll
Payroll dept receives personnel action
forms from personnel department and
time cards from production department.
Uses them to:
prepare the payroll register which is
forwarded to A/P department
 showing gross pay, deductions, overtime pay, and net
pay of each employee for each payroll period.
enter the information into the employee payroll
records (pay slip)
prepare paychecks
PREPARE PAYROLL
send paychecks to Cash Disbursements and a
copy of the payroll register to Accounts
Payable
Files the time cards, personnel action form,
and copy of the payroll register
Distribute Paycheck
A form of payroll fraud involves submitting
time cards for nonexistent employees.
To prevent this, many companies use a
paymaster to distribute the paychecks to
employees.
A paymaster, usually, cash disbursement
department is independent of the payroll
process
If a valid employee does not claim a paycheck,
the paymaster returns the check to payroll.
Prepare Accounts Payable
The accounts payable (AP) clerk
 reviews the payroll register for correctness
prepares copies of a cash disbursement
voucher for the amount of the payroll.
The clerk records the voucher in the
voucher register
submits the voucher packet (cash
disbursement voucher and payroll register)
to cash disbursements.
A copy of the disbursement voucher is sent
to the general ledger function.
Prepare Cash Disbursement
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
(payroll imprest account), which is used only for payroll.
Funds must be transferred from the general cash
account to this imprest account before the
paychecks can be cashed.
The clerk sends a copy of the check along voucher
packet to the AP department
journal voucher is prepared and sent to the general
ledger function.
 Update General Ledger
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
 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
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
either the department managers or higher level
of management depending on the materiality level.
Once the request is approved and a supplier is
selected, the fixed asset acquisition task is
similar to the expenditure cycle procedures with
two differences.
ASSET ACQUISITION
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
 Asset Maintenance
 Asset maintenance involves adjusting the fixed asset subsidiary
account balances as the assets (excluding land) depreciate over
time or with usage
 To initiate this task is the depreciation schedule.
 It shows when and how much depreciation to record.
 It also shows when to stop taking depreciation on fully
depreciated assets
 Asset maintenance also involves adjusting asset accounts to
reflect the cost of physical improvements that increase the
asset’s value or extend its useful life.
 Finally, the fixed asset system must promote accountability by
keeping track of the physical location of each asset. This should be
indicated in the fixed asset subsidiary ledger.
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
It begins when the responsible
manager issues a request to
dispose of the asset.
Asset Disposal
Like any other transaction, the disposal of
an asset requires proper approval.
Once sold, 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
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)