The Expenditure

Cycle
Part II: Payroll
Processing and Fixed
Asset Procedures

CHAPTER: 6
 LEARNING OBJECTIVES
01 Recognize the fundamental tasks that constitute the payroll and
fixed asset processes.

02 Be able to identify the functional departments involved in payroll

and fixed asset activities and trace the flow of these transactions
through the organization.

03 Be able to specify the documents, journals, and accounts that

provide audit trails, promote the mainte- nance of historical records,
and sup- port internal decision making and financial reporting.
04 Understand the exposures associated with payroll and fixed asset
activities and recognize the controls that reduce these risks.

Be aware of the operational features and the control implications of

05 technology used in payroll and fixed asset systems.

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 The Conceptual 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.

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 Personnel Department
The personnel department prepares and submits personnel action
forms to the prepare payroll function. These documents identify
employees authorized to receive a paycheck and are used to reflect
changes in hourly pay rates, payroll deductions, and job
classification.

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Date: November 2026 | Presented by: Salford & Co. Performance Team
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Production Department
Production employees prepare two types of time records: job tickets and time
cards. 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 em- ployee is at work. These are sent to the prepare payroll function
for calculating the amount of the employee's paycheck.

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 Prepare Payroll
1. Prepares the payroll register showing gross pay,
deductions, overtime pay, and net pay.
2. Enters the 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.

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Date: November 2026 | Presented by: Salford & Co. Performance Team
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Date: November 2026 | Presented by: Salford & Co. Performance Team
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 PREPARE ACCOUNTS
PAYABLE
The accounts payable (AP)
DISTRIBUTE clerk reviews the payroll
Prepare Cash
PAYCHECK register for correctness and
prepares copies of a cash Disbursement
A form of payroll fraud disbursement voucher for the
Upon receipt of the voucher
involves submitting time amount of the payroll.
packet, the cash
cards for nonexistent disbursements function
employees. To prevent this, prepares a single check for the
many companies use a entire amount of the payroll
paymaster to distribute the and deposits it in the payroll
paychecks to employees. imprest account.

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Update General Ledger
The general ledger function receives the labor distribution summary from cost
accounting, the disbursement voucher from AP, and the journal voucher from cash
disbursements. With this information, the genral ledger clerk makes the following
accounting entries:

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PAYROLL CONTROLS

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Transaction Authorization
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.

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Segregation of Duties
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.

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Supervision
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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Accounting Records
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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 Access Controls
The assets associated with the payroll system are labor and cash.
Both can be misappropriated through improper access to
accounting records.

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Date: November 2026 | Presented by: Salford & Co. Performance Team
 Independent Verification
The following are examples of independent venfication controls in the
payroll system.
I. Verification of time.
II. Paymaster.
III. Accounts pavable
IV. General ledger.

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 MANUAL PAYROLL
SYSTEM
1. Payroll authorization and hours worked enter the payroll
department from two different sources personnel and
production.

2. The payroll department reconciles this infomation,

cakculates the payroll, and distributes paychecks to the
employees.

3. Cost accounting receives information regarding the time

spent on cach job from production.

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AUTOMATING THE PAYROLL SYSTEM
USING BATCH PROCESSING
The data processing department receives hard copy of the personnel
action forms iob tickets and time cards which it couverts to digital files.
Batch computer programs perform the check writing, detailed record
keeping, and general ledger functions.

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Control Implications
The strengths and weaknesses of this system are similar
to those in the batch system for general expenditures
discussed earlier. This system promotes accounting
accuracy and reduces check-writing errors.

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 REENGINEERING THE PAYROLL SYSTEM
For moderate-sized and large organizations, payroll processing is often
integrated within the human resource management (HRM) system. HRM
systems need to provide real-time access to personnel files for purposes of
direct inquiries and recording changes in employee status as they occur.

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 (1) the various departments transmit transactions to data processing via
teminals.

(2) direct access files are used for data stonge, and

(3) many processes are now performed in real time.

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Date: November 2026 | Presented by: Salford & Co. Performance Team
Personnel
The personnel department makes changes to the employee
file in real time via terminals.

Cost accounting
The cost accounting department enters job cost data to
create the labor usage file.

Time keeping
The time-keeping department creates the current
attendance file.

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Data Processing
1. Labor costs are distributed to various WIP, overhead, and expense accounts.

2. An online labor distribution summary file is created. Copies of the file are sent to the cost
accounting and general ledger departments.

3. An online payroll register is created from the attendance file and the employee file. Copies of
the files are sent to the AP and cash disbursements departments.

4. The employee records file is updated.

5. Payroll checks are prepared and signed. They are sent to the treasurer for review and
reconciliation with the payroll register. The paychecks are then distributed to th employees.

6. The disbursement voucher file is updated and a check is prepared for the funds transfer to the
payroll imprest account. The check and a hard copy of the disbursement voucher are sent to
cash disbursements. One copy of the voucher is sent to the general ledger department, and the
final copy is sent to AP.

7. At the end of processing, the system retrieves the labor distribution summary file and the
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disbursements voucher file and updates the general ledger file.
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 Control Implications
Computer-based systems must pro duce adequate records for
independent verification and audit purposes. Also, controls must be
imple-mented to protect against unauthorized access to data files and
computer programs.

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 The Conceptual Fixed
Asset System
Fixed assets are the property, plant, and equipment used in the
C
operation of a business. These are relatively permanent items that often
collectively represent the largest financial investment by the
organization.

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 Specific objectives of the fixed asset system are to:
1. Process the acquisition of fixed assets as needed and in accordance with formal management
approval and procedures.

2. Maintain adequate accounting records of asset acquisition, cost, description, and physical location
in the organization.

3. Maintain accurate depreciation records for depreciable assets in accordance with acceptable
methods. C

4. Provide management with information to help plan for future fixed asset investments.

5. The fixed asset system differs from the expenditure cycle in two key ways:
1. Transaction Frequency and Approval – Inventory purchases are routine, while fixed asset
acquisitions are rare and require formal approval.
2. Accounting Treatment – Inventory is expensed immediately, but fixed assets are capitalized and
depreciated over time.

Date: November 2026 | Presented by: Salford & Co. Performance Team
 THE LOGIC OF A FIXED ASSET SYSTEM
The process involves three categories of tasks:
asset acquisition
asset maintenance
asset disposal. C

Date: November 2026 | Presented by: Salford & Co. Performance Team
 C

Date: November 2026 | Presented by: Salford & Co. Performance Team
 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.

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Date: November 2026 | Presented by: Salford & Co. Performance Team
 Asset Maintenance
Asset maintenance involves adjusting the fixed asset subsidiary account balances
as the assets (excluding land) depreciate over time or with usage. Common
depreciation methods in use are straight line, sum-of- the-years' digits, double-
declining balance, and units of production.

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 Asset Disposal
When an asset has reached the end of its useful life or when
management decides to dispose of it, the asset must be
removed from the fixed asset subsidiary ledger.

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The Physical Fixed Asset System

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 COMPUTER-BASED FIXED
ASSET SYSTEM
Because many of the tasks in the fixed asset system are similar in concept to the purchases
system in Chapter 5, we will dispense with a review of manual procedures

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Acquisition Procedures
The process begins when the fixed asset accounting clerk
receives a receiving report and a cash disburse-ment voucher.
These documents provide evidence that the firm has physically
received the asset and show its cost.

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Asset Maintenance
The fixed asset system uses the depreciation schedules to record end-of-
period depreciation transactions automatically. The specific tasks include;
(1) calculating the current period's depreciation

(2) updating the accumulated depreciation and book value fields in the
subsidiary records

(3) posting the total amount of depreciation to the affected general ledger
accounts.

(4) recording the depreciation transaction by adding a record to the joumal

voucher file.
 Disposal Procedures
The disposal report fomally authorizes the fixed asset
department to remove from the ledger an asset disposed of
by the user department.

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 Authorization Controls
Fixed asset acquisitions should be fomal and explicitly authorized. Each
transaction should be initiated by a written request from the user or
department.

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 Supervision Controls
Because capital assets are widely distributed throughout the organization, they are more
susceptible to theft and misappropriation than inventories that are secured in a warehouse.

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 Independent Verification
Controls Periodically, the internal auditor should review the asset
acquisition and approval procedures to determine the reasonableness
of factors used in the analysis.

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Thank You

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