AEC 07 |

ACCOUNTING
INFORMATION
SYSTEM
2nd Year BS Accountancy & BS Management Accounting
University of Southern Mindanao- Kabacan

Instructor: Lady Enginee Alocelja, CPA

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 TRANSACTION CYCLES
AND BUSINESS
PROCESSES

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 TRANSACTION CYCLES AND
BUSINESS PROCESSES
The Expenditure Cycle
Part II: Payroll Processing
and Fixed Asset
Procedures

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 Payroll System
Payroll processing is actually a special-case purchases system in which the organization purchases labor rather than
raw materials or finished goods for resale. The nature of payroll processing, however, creates the need for specialized
procedures, for the following reasons:

1. A firm can design general purchasing and disbursement procedures that apply to all vendors and inventory items. Payroll procedures,
however, differ greatly among classes of employees. For example, different procedures are needed for hourly employees, salaried
employees, piece workers, and commissioned employees. Also, payroll processing requires special accounting procedures for employee
deductions and withholdings for taxes that do not apply to trade accounts.

2. General expenditure activities constitute a relatively steady stream of purchasing and disbursing transactions. Business organizations
thus design purchasing systems to deal with their normal level of activity. Payroll activities, on the other hand, are discrete events in which
disbursements to employees occur weekly, biweekly, or monthly. The task of periodically preparing large numbers of payroll checks in
addition to the normal trade account checks can overload the general purchasing and cash disbursements system.

3. Writing checks to employees requires special controls. Combining payroll and trade transactions can encourage payroll fraud.

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 Payroll System
A Payroll System within an Accounting Information System (AIS) is a specialized module or
application that automates and manages employee compensation, including calculating
salaries, deductions, and payments, ensuring accurate and timely payroll processing.

Personnel Dept/ Human Production

Resource Dept Department Prepare Payroll Distribute
Paycheck
The personnel department prepares and Production employees prepare two
submits personnel action forms to the types of time records: job tickets and
prepare payroll function. time cards.

These documents identify employees Job tickets capture the time that
authorized to receive a paycheck and are
used to reflect changes in hourly pay
individual workers spend on each
production job. Cost accounting uses
Prepares Accounts
rates, payroll deductions, and job
classification.
these documents to allocate direct
labor charges to work-in-process
Payable
(WIP) accounts.

Time cards capture the time the

employee is at work. These are sent to
the prepare payroll function for
calculating the amount of the
employee’s paycheck Update General Prepare Cash
legder Disbursement

HR plays a crucial role in payroll management by providing employee data, managing compensation and benefits,
ensuring compliance with labor laws, and acting as a liaison between employees and the payroll department
 Types of Salaries and Wages

Types of Wages:
Hourly Wages: Paid per hour worked, common for part-time or temporary positions.
Salaried Wages: A fixed amount paid regularly, regardless of hours worked, typically on a monthly or annual basis.
Commission-Based Wages: Compensation tied to sales or performance metrics, often varying from month to month.
Overtime Wages: Paid for work exceeding the standard 40-hour work week, often at a higher rate.
Bonus Pay: Additional compensation for meeting specific goals or performance targets.
Severance Pay: Compensation provided to employees upon termination of employment.
Accrued Time Off Pay: Compensation for accumulated vacation or sick time.
Incentive Pay: Additional compensation to motivate employees to achieve specific goals or improve performance.
Piece Rate Pay: Employees are paid based on the number of units or pieces they complete, rather than through a fixed hourly
wage or salary.
Prevailing Wage: The standard wage rate for a particular job in a specific geographic area, often used in government contracts.
Redundancy Payments: Compensation for the loss of employment, not loss of earnings.
Vacation Pay: Regular wages or salary received by an employee while on annual vacation leave.
Income Statement
 Payroll System

Prepare Payroll:

The payroll department receives pay rate and withholding data from the personnel department and hours
worked data from the production department. A clerk in payroll then performs the following tasks.

1. Prepares the payroll register showing gross pay, deductions, overtime pay, and net pay.
2. Enters the this information into the employee payroll records .
3. Prepares employee paychecks
4. Sends the paychecks to the distribute paycheck function.
5. Files the time cards, personnel action form, and copy of the payroll register.
Payroll Register
Employee Payroll Records
Employee Paycheck
Update General ledger
Account DR CR

Work-In-Progress / WIP (Direct Labor) Xx,xxx

Factory Overhead (Indirect Labor) Xx,xxx
Withholding Tax Payable- Compensation xxx
SSS Payable xx
PhilHealth Payable xx
Pag-Ibig Payable xx
Wages Payable X,xxx
#Set up of Wages Payable

Account DR CR

Wages Payable X,xxx

Cash in Bank – BDO Kidapawan 001 X,xxx
# Cash Disbursement Entry
Expenditure Cycle Controls

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Expenditure Cycle Controls
Transaction Authorization - The objective of transaction authorization is to ensure that only valid
transactions are processed.

A form of payroll fraud involves submitting time cards for employees who no longer work for the firm. To
prevent this, the personnel action form helps payroll keep the employee records current. This document
describes additions, deletions, and other changes to the employee file and acts as an important
authorization control to ensure that only the time cards of current and valid employees are processed.

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 Expenditure Cycle Controls
Segregation of Duties - Segregating duties ensures that no single individual or department processes a
transaction in its entirety.

The time-keeping function and the personnel function should be separated. The personnel function provides payroll with pay
rate information for authorized hourly employees. Typically, an organization will offer a range of valid pay rates based on
experience, job classification, seniority, and merit. If the production (time-keeping) department provided this information, an
employee might submit a higher rate and perpetrate a fraud.

For purposes of operational efficiency, the payroll function performs several tasks. Some of these are in contradiction with
basic internal control objectives. For example, the payroll function has both asset custody (employee paychecks) and record-
keeping responsibility (employee payroll records). This is the equivalent in the general purchases system of assigning AP and
cash disbursement responsibility to the same person. Segregating key aspects of the payroll transaction between AP and cash
disbursement functions returns control to the process. AP reviews the work done by payroll (payroll register) and approves
payment. Cash disbursements then writes the check to cover the total payroll. None of the employee paychecks is a
negotiable instrument until the payroll check is deposited into the imprest account.

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Expenditure Cycle Controls
Supervision- Supervision is an internal control tool that helps organizations ensure compliance with
policies, regulations, and ethical standards.

Sometimes employees will clock in for another worker who is late or absent. Supervisors should observe
the time-keeping process and reconcile the time cards with actual attendance.

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Expenditure Cycle Controls
Accounting Records - The control objective of accounting records is to maintain an audit trail adequate for tracing a
transaction from its source document to the financial statements.

The audit trail for payroll includes the following documents:

1. Time cards, job tickets, and disbursement vouchers.
2. Journal information, which comes from the labor distribution summary and the payroll register.
3. Subsidiary ledger accounts, which contain the employee records and various expense accounts.
4. The general ledger accounts: payroll control, cash, and the payroll clearing (imprest) account.

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Expenditure Cycle Controls
Access Control
The assets associated with the payroll system are labor and cash. Both can be misappropriated through
improper access to accounting records. A dishonest individual can misrepresent the number of hours
worked on the time cards and thus embezzle cash. Similarly, control over access to all journals, ledgers,
and source documents in the payroll system is important, as it is in all expenditure cycle systems.

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Expenditure Cycle Controls
Independent Verification - The objective of independent verification is to verify the accuracy and
completeness of tasks that other functions in the process perform.

The following are examples of independent verification controls in the payroll system:
1. Verification of time. Before sending time cards to payroll, the supervisor must verify their accuracy
and sign them.
2. Paymaster. The use of an independent paymaster to distribute checks (rather than the normal
supervisor) helps verify the existence of the employees. The supervisor may be party to a payroll fraud by
pretending to distribute paychecks to nonexistent employees.
3. Accounts payable. The AP clerk verifies the accuracy of the payroll register before creating a
disbursement voucher that transfers funds to the imprest account.
4. General ledger. The general ledger department provides verification of the overall process by
reconciling the labor distribution summary and the payroll disbursement voucher.

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