Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedure

Manual Payroll System

• Personnel department uses personnel action forms to:

  • Activate new employees

  • Change 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 time spent by worker on each production job

• Time cards: capture total time worked each pay period for payroll calculations

• Must be signed by a supervisor

• Job tickets

• 
  

• capture total time worked each pay period for payroll calculations

• Time cards:

• account for time spent by worker on each production job

• Cost Accounting department:

• 
  

  • Uses job tickets to allocate labor costs to WIP accounts

  • Summarizes these charges in a labor distribution summary

  • Forwards labor distribution summary to G/L department

• Payroll department

• receives personnel action forms and time cards

• Uses them to:

  • Prepare payroll register

  • Enter information into employee payroll records

  • Prepare paychecks

  • Send paychecks to Cash Disbursements

  • Send copy of payroll register to Accounts Payable

• Accounts Payable department:

• Prepares cash disbursements voucher for total amount of payroll

• Sends copies to Cash Disbursements and G/L departments

• Cash Disbursements department:

• 
  

  • Reviews and signs paychecks

  • Forwards paychecks to paymaster for distribution to employees

  • Writes check for payroll and deposits it into payroll imprest account

• G/L department makes journal entries:

  • From Labor Distribution Summary:

    • WIP (Direct Labor)

    • Factory Overhead (Indirect Labor)

    • Wages Payable

  • From Distribution Voucher:

    • Wages Payable

    • Cash

    • Fed. Inc. Tax Withholding Payable

    • State Inc. Tax Withholding Payable

    • FICA Withholding Payable

    • Other Withholding Payables

• Transaction authorization

Payroll Controls

• —-: personnel action form helps prevent:

  • Terminated employees from receiving checks

  • Wage rates from being improperly changed for current employees

• Segregation of Duties

Payroll Controls

• —-: timekeeping and personnel functions should be separated

• Supervision

• —-: need to monitor employees to ensure they are not “clocking in” for one another

• Accounting Records

Payroll Controls

• —-: audit trail includes:

  • Time cards

  • Job tickets

  • Disbursement vouchers

  • Labor distribution summary

  • Payroll register

  • Subsidiary ledger accounts

  • General ledger accounts

• Access Controls

Payroll Controls

• —-: need to prevent employees from having improper access to:

  • Accounting records, such as time cards which can be altered

  • Unsigned checks

• Independent Verification

• 
  

Payroll Controls

• —-:

  • Verification of time cards

  • Distribution of paychecks to authorized employees

  • Verification of accuracy of payroll register by A/P department

  • G/L department reconciles labor distribution summary and payroll disbursement voucher

Computer-Based Payroll Systems

• Payroll is well-suited to batch processing and sequential files

• Most employees on master file receive paychecks periodically

• Computer program performs detailed record-keeping, check-writing, and general ledger functions

• reengineered as part of human resource management (HRM) OR Reengineered HRM Systems

• Payroll can be ___

• IT can process a wide range of personnel-related data, including:

  • Employee benefits

  • Labor resource planning

  • Employee skills and training

  • Pay rates, deductions, and paychecks

  • Evaluations

Key Features of Reengineered HRM

• Personnel: can make changes to employee file in real time

• Cost Accounting: enters job cost data either daily or in real time

• Timekeeping: enters attendance file daily

• Data Processing: still uses batch processing and prepares all reports, checks, and updates general ledger

Reengineered HRM Systems

• Differ from automated manual and batch/sequential file systems because:

  • Operations departments 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

• Fixed Assets

• —-: property, plant, and equipment used in operation of a business

• 1. Acquisition of asset; 2. Depreciation; 3. Subsequent expenditures; 4. Disposal of asset

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 retirement and disposal of fixed assets

Asset Acquisition

• Begins when a department 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 department performs record-keeping functions

Asset Maintenance

• Involves adjusting FAS subsidiary account balances as assets depreciate

• Depreciation calculations are internal transactions that FAS system bases upon a depreciation schedule

• Physical improvements must also be recorded to increase subsidiary account balance and depreciation schedule

Asset Disposal

• At end of asset’s useful life (or earlier disposition), asset must be removed from 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 system, along with information such as useful life, depreciation methods, etc.

• Ledgers are automatically updated

Computer-Based Fixed Asset System: Maintenance

• Computerized FAS automatically:

  • Calculates current period’s depreciation

  • Updates accumulated depreciation and book-value fields in subsidiary records

  • Posts total depreciation to affected general ledger accounts

  • Records depreciation transactions by adding records to journal voucher file

Computer-Based Fixed Asset System: Disposal

• Computerized FAS automatically:

  • Posts adjusting entries to fixed asset control account in general ledger

  • Records losses or gains associated with disposal transaction

  • Prepares journal voucher records

FAS Controls

• Authorization

• Supervision

• Independent Verification

• 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

Independent Verification

• ___: internal auditors should periodically verify FAS records:

  • Reasonableness of factors used in decisions (useful life, discounts, budgeting model)

  • Location, condition, and fair value of fixed asset records in subsidiary ledger

  • Programming logic for automatic calculations (depreciation)