Payroll & Fixed Assets: Expenditure Cycle Part II

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

• The chapter focuses on payroll and fixed asset processes within accounting information systems.
• It provides an overview of the fundamental tasks, functional departments, and transaction flows involved in these processes.
• It discusses the documents, journals, and accounts necessary for audit trails, record maintenance, decision-making, and financial reporting.
• The chapter discusses associated exposures and controls to reduce risks, and operational features and control implications of technology used in payroll and fixed asset systems.

Manual Payroll System

• The personnel department uses personnel action forms to activate new employees, change pay rates, change marital status and/or number of dependents, and terminate employees.
• Production employees complete job tickets to account for time spent on each production job and time cards to capture total time worked each pay period.
• Time cards needs to be signed by a supervisor.
• The Cost Accounting department uses job tickets to allocate labor costs to Work-in-Process (WIP) accounts.
• The Cost Accounting department summarizes these charges in a labor distribution summary.
• The Payroll Department receives personnel action forms and time cards.
• The Payroll Department prepare the payroll register, enter the information into the employee payroll records, and prepare paychecks.
• The Payroll Department sends paychecks to Cash Disbursements and a copy of the payroll register to Accounts Payable.
• The Accounts Payable department prepares a cash disbursement voucher for the total payroll amount and sends copies to the Cash Disbursements and General Ledger departments.
• The Cash Disbursement department reviews and signs paychecks and forwards them to a paymaster for distribution.
• The Cash Disbursement department writes a check for the payroll and deposits it into the payroll imprest account.
• Payroll Imprest account deposits the total payroll from the operating account.
• General Ledger (G/L) department makes journal entries from the labor distribution summary.
• General Ledger (G/L) department makes journal entries from the distribution voucher for wages payable, cash, taxes, and other withholdings payable.
• General Ledger (G/L) department makes a journal entry to transfer cash from the operating bank account to the payroll imprest account: debiting cash-payroll imprest account, and crediting cash-operating account.

Payroll Controls

• Transaction authorization prevents terminated employees from receiving checks and wage rates from being improperly changed.
• There should be a segregation of duties, timekeeping and personnel functions should be separated.
• Supervision ensures employees are not "clocking in" for one another.
• Accounting records provide an audit trail, time cards, job tickets, disbursement vouchers, labor distribution summary, payroll register, subsidiary ledger and general ledger accounts
• Access controls should prevent unauthorized access to blank checks and time cards.
• Independent verification includes verification of time cards, paycheck distribution, and accuracy of payroll register by the A/P department.
• General Ledger reconciles the labor distribution summary and 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 part of human resource management (HRM) and process various personnel-related data, including employee benefits, labor resource planning, skills and training, pay rates, and evaluations.
• Personnel makes 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, checks, and updates the general ledger.
• Reengineered HRM Systems transmit transactions to data processing via terminals, use direct access files for storage, perform many processes in real time, and require real-time access to personnel files for direct inquiries.

The Fixed Asset System (FAS)

• Fixed assets are property, plant, and equipment used in business operations.
• The life cycle of a fixed asset includes aquisition, depreciation, subsequent expenditure and disposal.

Objectives of FAS

• The goal of FAS is to acquire fixed assets in accordance with management approval and procedures.
• Maintain adequate accounting records of asset acquisition, cost, description, location and depreciation records for depreciable assets.
• Provide management with information to help with future fixed asset investments and properly record the retirement and disposal of fixed assets.

Asset Acquisition

• Begins when a department manager determines a fixed asset needs replacement or a new asset is warranted.
• A purchase requisition is filled out, this may require an authorizing signature for items over a pre-specified limit.
• The FAS department 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, increasing 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 records and depreciation schedule.
• Disposal requires disposal request forms and disposal reports as source documents.

Computer-Based Fixed Asset System — Acquisition

• Receipt of assets are digitally recorded in the system with useful life, depreciation methods, etc.
• Ledgers are automatically updated.

Computer-Based Fixed Asset System — Maintenance

• The information for computerized FAS includes calculating monthly depreciation and adjusting accumulated depreciation and posting total depreciation for affected ledger.

Computer-Based Fixed Asset System — Disposal

• Computerized FAS posts adjusting entries to the fixed asset control account, records losses or gains associated with the disposal transaction, and prepares journal voucher records.

FAS Controls

• Authorization should be formal and explicit due to the high cost - like acquisitions and changes in depreciation methods.
• Supervision - threat of misappropriation requires constant management oversight (secure physical locations of assets and monitor on-the-job activities)
• Independent verification is where internal auditors periodically verify FAS records such as reasonableness, location, condition and programming logic.