Chapter 6 Manual Payroll System

The Expenditure Cycle Part II:

Payroll Processing and Fixed Asset The Personnel department uses personnel
Procedures action forms to:
 activate new employees
Objectives for Chapter 6  change the pay rate of employees
 Fundamental tasks of the payroll and  change marital status and/or number of
fixed asset processes dependents
 Functional departments of payroll and  terminate employees
fixed asset activities and the flow of
transactions through the organization The production employees fill out two forms:
 Documents, journals, and accounts that  job tickets - account for the time spent
provide audit trails, promote the by the individual worker on each
maintenance of records, and support production job
decision making and financial reporting  time cards - used to capture the total
 Exposures associated with payroll and time worked each pay period for payroll
fixed asset activities and the controls that calculations; must be signed by a
reduce these risks supervisor
 Operational features and the control
implications of technology used in payroll The Cost Accounting department:
and fixed asset systems o uses the job tickets to allocate labor
costs to WIP accounts
DFD of Payroll Procedures o summarizes these charges in a labor
distribution summary which is
forwarded to the General Ledger
department

The Payroll department receives the personnel

action forms and the time cards.

It uses them to perform the following tasks:

 prepares the payroll register
 enters the information into the employee
payroll records
 prepares paychecks
 sends paychecks to Cash
Disbursements and a copy of the payroll
register to Accounts Payable

Accounts Payable department:

o prepares a cash disbursements
voucher for the total amount of the
payroll
o sends copies to the Cash
Disbursements and General Ledger
departments

Cash Disbursements reviews and signs the

paychecks and forwards them to a paymaster
for distribution to the employees.
Cash Disbursements writes a check for the  general ledger accounts
payroll and deposits it into the payroll
imprest account. Access Controls - need to prevent employees
from having improper access to:
General Ledger makes the following entries:  accounting records, such as time cards
which can be altered
FROM LABOR DISTRIBUTION SUMMARY  unsigned checks

WIP (Direct Labor) DR Independent Verification:

Factory Overhead (Indirect Labor) DR  verification of time cards
Wages Payable CR  distribution of paychecks to authorized
employees
FROM DISTRIBUTION VOUCHER  verification of accuracy of payroll register
by accounts payable
Wages Payable DR  general ledger reconciles the labor
Cash CR distribution summary and the payroll
Fed. Inc. Tax Withholding Payable CR disbursement voucher
State Inc. Tax Withholding
Payable CR Computer-Based Payroll Systems
FICA Withholding Payable CR o Payroll is well-suited to batch
Other Withholding Payable CR processing and sequential files,
since a majority of the employees
Further, the General Ledger department needs on the master file will receive a
to make a journal entry to transfer the cash paycheck every pay period.
from the operating bank account to the payroll o The computer program performs
imprest account: the detailed record-keeping, check-
Cash - Payroll Imprest Account DR writing, and general ledger
Cash - Operating Account functions.
CR Human Resource Management (HRM)
Payroll Controls Systems

Transaction authorization - the personnel o A re-engineered IT that captures and

action form is important in preventing: processes a wide range of personnel-
 terminated employees from receiving related data, including:
checks  employee benefits
 wage rates from being improperly  labor resource planning
changed for current employees  employee skills
 pay rates and deductions
Segregation of Duties - timekeeping and  evaluations
personnel functions should be separated  payroll

Supervision - need to monitor employees to Key Features of HRM Systems

ensure they are not “clocking in” for one
another 1. Personnel - can make changes to the
employee file in real time
Accounting Records - audit trail includes: 2. Cost Accounting - enters job cost data
 time cards either daily or in real time
 job tickets 3. Timekeeping - enters the attendance
 disbursement vouchers file daily
 labor distribution summary
 payroll register
 subsidiary ledger accounts
 4. Data Processing - still uses batch
processing and prepares all reports, the
checks, and updates the general ledger

HRM Systems
- differ from automated batch, sequential
file systems in the following ways:
 operations depts. transmit
transactions to data processing via
terminals
 direct access files are used for
storage
 many processes are performed real
time The Fixed Asset System (FAS)
 real-time access to personnel files
required for direct inquiries Fixed Assets - property, plant, and equipment
used in the operation of a business
Reengineering Payroll
 Payroll can be reengineered as a part of Life of a Fixed Asset
human resource management (HRM).
 In reengineered payroll systems
 operations departments transmit
transactions to data processing via
terminals
 direct access files are used for data
storage
 many processes are now performed
in real time.

Reengineering Payroll—Before

DFD of Fixed Asset System

Reengineering Payroll—After

Objectives of the FAS

 Process the acquisition of fixed assets Asset Disposal
as needed and in accordance with formal
management approval and procedures  At the end of the useful life or an earlier
disposition of the asset, the asset must
 Maintain adequate accounting records be removed from the records.
of asset acquisition, cost, description, and
physical location in the organization  The disposal requires a disposal
request and disposal report as source
 Maintain accurate depreciation records documents to remove the asset from the
for depreciable assets in accordance with records and the depreciation schedules.
acceptable method
Computer-Based Fixed Asset
 Provide management with information System--Acquisition
to help it plan future fixed asset
investments Acquisition - the receipt of the asset is
recorded, along with information such as its
 Properly record the retirement and useful life, depreciation methods, etc. and the
disposal of fixed assets ledgers are automatically updated

Asset Acquisition Computer-Based Fixed Asset System--

Maintenance
 Generally begins with a department
manager determining that an old fixed Computerized FAS will automatically:
asset needs to be replaced or the need for  calculate current period’s depreciation
a new fixed asset is warranted  update the accumulated depreciation
and book-value fields in the subsidiary
 The manager fills out a purchase records
requisition and may require a signature  post the total amount of depreciation to
for items over a pre-specified limit. the affected general ledger accounts

 The fixed asset department performs the o depreciation expense and

record-keeping function. accumulated depreciation
 record the depreciation transaction by
adding a record to the journal voucher
file
Asset Maintenance Computer-Based Fixed Asset System--
Disposal
 Involves adjusting the fixed asset
subsidiary account balances as the Computerized FAS will automatically:
assets depreciate over time (or deplete  post an adjusting entry to the fixed
with usage) asset control account in the general
ledger
 Depreciation calculations are internal  record any loss or gain associated
transactions that the fixed asset system with the disposal transaction
must process based upon a  prepare a journal voucher record
depreciation schedule.
Controlling the Fixed Asset System
 Physical improvements must also be
recorded to increase the subsidiary Authorization should be formal and explicit
account balance and depreciation because of high cost of PPE:
schedule.  acquisitions
 changes in depreciation methods
Supervision - threat of misappropriation
requires constant management supervision:
 theft--secure the physical location of
assets
 misuse--monitor on-the-job activities

Independent Verification Controls - the

internal auditor should periodically verify FAS
records:
 the reasonableness of factors used in
decisions (useful life, discounts,
budgeting model)
 location, condition, and fair value of the
fixed asset records in the subsidiary
ledger
 the programming logic for automatic
calculations (depreciation)