Chapter 6

The Expenditure Cycle

Part II: Payroll Processing
and Fixed Asset Procedures

Principles of Accounting Information

Systems, Asia Edition
James A. Hall

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 Manual Payroll System

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 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

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 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

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 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.

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 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

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 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.

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 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

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 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

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 Payroll Controls

 Transaction authorization - the

personnel action form helps prevent:
 terminated employees from receiving
checks
 wage rates from being improperly
changed for current employees

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 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

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 Payroll Controls

 Accounting Records - audit trail

includes:
 time cards
 job tickets
 disbursement vouchers
 labor distribution summary
 payroll register
 subsidiary ledger accounts
 general ledger accounts
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 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

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 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
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 The Fixed Asset System (FAS)

 Fixed Assets - property, plant, and

equipment used in the operation of a
business

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 Life of a Fixed Asset
2. Depreciation.
1. Acquisition 4. Disposal
3. Subsequent
of asset. of asset.
expenditures.
Asset
cost $

Cost Salvage
value
Time (useful life)
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 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.

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 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.

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 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.

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 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

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 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)

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