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The Expenditure Cycle: Payroll Processing and Fixed Asset Procedures

This chapter discusses the payroll processing system and fixed asset system. It covers the conceptual overview and logic of the payroll cycle, including key tasks like preparing payroll, distributing paychecks, and updating accounting records. It also discusses controls and trends toward integrating payroll with human resource systems. For fixed assets, it outlines the acquisition, maintenance, and disposal processes and how computerization allows for real-time processing of fixed asset transactions.

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457 views19 pages

The Expenditure Cycle: Payroll Processing and Fixed Asset Procedures

This chapter discusses the payroll processing system and fixed asset system. It covers the conceptual overview and logic of the payroll cycle, including key tasks like preparing payroll, distributing paychecks, and updating accounting records. It also discusses controls and trends toward integrating payroll with human resource systems. For fixed assets, it outlines the acquisition, maintenance, and disposal processes and how computerization allows for real-time processing of fixed asset transactions.

Uploaded by

Hassan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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chapter 6

The Expenditure Cycle


Part II: Payroll Processing
and Fixed Asset
Procedures
Introduction
This chapter is divided into two major sections. The first
section begins with a conceptual overview of the payroll
process emphasizing logical tasks, key entities, sources and
uses of information, and the flow of key documents through
an organization. The second section examines fixed asset
systems. Fixed assets are the property, plant, and equipment
used in the operation of a business. This discussion focuses
on processes relating to the acquisition, maintenance, and
disposal of its fixed assets. Finally, we illustrate these
concepts with a real-time example.
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. 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.
Cont..
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 payments to
employees occur weekly, 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.
Cont..
Although specific payroll procedures vary among firms, Figure 6-1 presents a
data flow diagram depicting the general tasks of the payroll system in a
manufacturing firm. The key points of the process are described in the following
paragraphs:
 Personnel Department.
 Production Department.
Job tickets: The time that individual workers spend on each production job.
Time cards: The time the employee is at work.
 Update WIP Account.
 Prepare Payroll.
 Distribute Paycheck.
 Prepare Accounts Payable.
 Prepare Cash Disbursement.
 Update General Ledger.
Figure 6-1: data flow diagram of payroll procedures
Payroll controls

 Transaction Authorization.
 Segregation of Duties.
 Supervision.
 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 account.
 Access Controls.
MANUAL PAYROLL SYSTEM
Manually, the traditional pay roll systems respectively follow the
following processes:
 Production
 Cost Accounting
 Payroll
 Accounts Payable
 Cash Disbursements
 General Ledger
Computer-Based Payroll Systems
Automating the payroll system using batch processing:
Because payroll systems run periodically (weekly or
monthly), they are well suited to batch processing. The data
processing department receives hard copy of the personnel
action forms, job tickets, and time cards, which it converts to
digital files. Batch computer programs perform the check
writing, detailed record keeping, and general ledger
functions.
Reengineering the payroll system
For moderate-sized and large organizations, payroll processing is often
integrated within the human resource management (HRM) system. The HRM
system captures and processes a wide range of personnel-related data,
including employee benefits, labor resource planning, employee relations,
employee skills, and personnel actions (pay rates, deductions, and so on), as
well as payroll. 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. This system differs from the simple automated system in three
ways: (1) the various departments transmit transactions to data processing via
terminals, (2) direct access files are used for data storage, and (3) many
processes are now performed in real time.
Cont..
Reengineered payroll systems look like:
 Personnel.
 Cost Accounting.
 Time-Keeping.
 Data Processing.
The Conceptual Fixed Asset System
Fixed assets are the property, plant, and equipment used in the operation of a
business. Examples of fixed assets include land, buildings, furniture,
machinery, and motor vehicles. A firm’s fixed asset system processes
transactions pertaining to the acquisition, maintenance, and disposal of its
fixed assets. The 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.
4. Provide management with information to help plan for future
fixed asset investments.
5. Properly record the retirement and disposal of fixed assets.
The logic of a fixed asset system
Figure 6-11 presents the general logic of the fixed asset system involves
three categories of tasks:
 Asset acquisition.
 Asset maintenance.
 Asset disposal.
Cont..
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. Figure 6-13 illustrates a
computer-based fixed asset system, which demonstrates real-time
processing. The top portion of the flowchart presents the fixed
asset acquisition procedures, the center portion presents fixed
asset maintenance procedures, and the bottom portion presents
the asset disposal procedures. To simplify the flowchart and focus
on the key features of the system, we have omitted the processing
steps for AP and cash disbursements.
Cont..
Cont..
Controlling the fixed asset system
Because of the similarities between the fixed asset system
and the expenditure cycle, many of the controls are the same
and have already been discussed. Our discussion of fixed
asset controls will thus focus on three areas of principal
difference between these systems:
 Authorization controls.
 Supervision controls; and
 Independent verification controls.
End

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