CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

CPA
,
Name:
2017
THE CONCEPTUAL PAYROLL SYSTEM
Payroll Processing
- it is a special- case purchases system in which the organization purchases labor
rather than raw materials or finished goods for sale.
Need for Specialized Procedure
1. Payroll procedures greatly among classes of employees. Also, payroll processing
requires special accounting procedures for employee deductions and withholdings
for taxes that do not apply to trade accounts.
2. Payroll activities are discrete events in which disbursements to employees occur
weekly, biweekly or monthly.
3. Writing checks to employees requires special control.
Personnel Department
It 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, payroll deductions and job classification.
Production Department
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 employee is at work.
These are sent to the prepare payroll function for calculating the amount of the
employees paycheck

Update WIP Account

The charges are summarized in a labor distribution summary and forwarded to
the general ledger function.
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 performs the following tasks:

1. Prepares the payroll register showing the gross pay, deductions, overtime pay
and net pay

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CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

2. Enters the above 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.
Distribute Paycheck
Paymaster is independent of the payroll process- not involved in payroll
authorization or preparation tasks.
If a valid employee does not claim a paycheck, the paymaster returns the check to
payroll.
Prepare Accounts Payable
The Accounts Payable (AP)clerk reviews the payroll register for correctness and
prepares copies of a cash disbursement voucher for the amount of the payroll.
The clerk records the voucher in the voucher register and submits the voucher
packet (voucher and payroll register) to cash disbursements.
A copy of the disbursement voucher is sent to the general ledger function.
Prepare Cash Disbursement
The cash disbursement function prepares a single check for the entire amount of
the payroll and deposits it in the payroll imprest account.
The employee paychecks are drawn on this account, which is used only for payroll.
The clerk sends a copy of the check along with the disbursement voucher and the
payroll register to the AP department, where they are filed.
Update General Ledger
The general ledger function receives the labor distribution summary from cost
accounting , the disbursement voucher from the AP and the journal voucher from
cash disbursement.
The general ledger clerk makes the following accounting entries:

From the Labor Distribution Summary

Work-in-Process (Direct Labor) xxx

Factory overhead (Indirect Labor) xxx
Wages Payable xxx

From Disbursement Voucher

Wages Payable xxx
Cash xxx
Federal IncomeTax
withholding Payable xxx
State Income Tax
Withholdings Payable xxx
FICA Income tax

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CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

Withholdings Payable xxx

Group Insurance
Premiums Payable xxx
Pension Fund
withholdings payable xxx
Union Dues Payable xxx

Payroll Controls

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 employees
records current

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.

Supervision
Supervisors should observe the time-keeping process and reconcile the time cards
with actual attendance.

Accounting Records
The audit trail for payroll includes the following documents:
1. Time cards, job tickets and disbursement vouchers
2. Journal information (labor distribution summary and payroll register)
3. Subsidiary ledger accounts (employee records and various expense accounts)
4. The general ledger accounts: payroll control, cash and the payroll clearing (imprest)
account

Access Controls
The assets associated with the payroll system are labor and cash.
A dishonest individual can misrepresent the number of hours worked in the time
cards and thus embezzle cash.

Independent Verification
Verification of time the supervisor must verify accuracy of time cards and sign
them
Paymaster helps verify the existence of the employees
Accounts Payable The AP clerk verifies the accuracy of the payroll register
before creating a disbursement voucher that transfers funds to the imprest
account.
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CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

General Ledger provides verification of the overall process by reconciling the

labor distribution summary and the payroll disbursement voucher

THE PHYSICAL PAYROLL SYSTEM

Manual Payroll System

KEY TASK NO. 1

Payroll authorization and hours worked enter the payroll department from two
different sources: PERSONNEL and PRODUCTION.

TIME CARDS (Production)

CAPTURES THE TIME THE EMPLOYEE IS AT WORK. USED FOR CALCULATING
PAYCHECK.

PERSONNEL ACTION FORM (Personnel)

IDENTIFY EMPLOYEES AUTHORIZED TO RECEIVE A PAYCHECK AND ARE USED TO
REFLECT CHANGES IN HOURLY PAY RATES, PAYROLL DEDUCTIONS, AND JOB
CLASSIFICATION

KEY TASK NO. 2

The payroll department reconciles these information, calculates payroll, and
distributes paychecks to the employees through a paymaster.

RECONCILE
RECONCILE PERSONNEL ACTION FORMS WITH RESPECTIVE TIME CARDS. PREPARE
PAYCHECKS. POST TO EMPLOYEE RECORDS.

PAYROLL DEPARTMENT PREPARES:

Payroll Register (1 FILE COPY, 1 COPY GOES TO ACCOUNTS PAYABLE DEPT.)
Paychecks

FILE PERSONNEL ACTION FORM, TIME CARDS, AND A COPY OF PAYROLL

REGISTER

KEY TASK NO. 3

Cost accounting receives information regarding the time spent on each job from job
tickets (production). This is used for posting to Work-in-Process account.

AFTER POSTING TO THE WIP ACCOUNT, THE CHARGES ARE SUMMARIZED IN A

LABOR DISTRIBUTION SUMMARY, AND THEN FORWARDED TO GENERAL LEDGER
FUNCTION.

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CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

KEY TASK NO. 4

Accounts Payable Department receives payroll summary information from payroll
department (payroll register) and authorizes the cash disbursements department to
deposit a single check, in the amount of the total payroll, in a bank imprest account
(payroll imprest account) on which the payroll is drawn.

ACCOUNTS PAYABLE DEPT. PREPARES:

Cash Disbursement Voucher (1 COPY FOR VOUCHER PACKET, 1 COPY TO
GENERAL LEDGER FUNCTION)

UPON RECEIPT OF VOUCHER PACKET, CLERK REVIEWS THE DOCUMENTS THEN

WRITES CHECKS TO IMPREST ACCOUNT. THEN UPDATES CHECK REGISTER.

A COPY OF THE CHECK AND THE VOUCHER PACKET IS SENT BACK TO ACCOUNT
PAYABLE DEPT. FOR FILING.

KEY TASK NO. 5

The general ledger department reconciles summary information from cost accounting
(labor distribution summary) and accounts payable department (cash disbursement
voucher). Control accounts are updated to reflect these transactions.

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

Payroll processing is often integrated within the human resource management
(HRM) system
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.

Personnel
The personnel department makes changes to the employee file in real time via
terminals.

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CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

These changes include additions of new employees, deletions of terminated

employees, changes in dependents, changes in withholding, and changes in job
status

Cost Accounting
The cost accounting department enters job cost data (real time or daily) to create
the labor usage file.

Time-Keeping
Upon receipt of the approved time cards from the supervisor at the end of the
week, the time-keeping department creates the current attendance file

Computer-Based Payroll Systems Real-Time Data Processing

At the end of the work period, the following tasks are performed in a batch process:
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
the 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 Gen ledger dept. and final copy is sent to AP.
7. At the end of processing, it retrieves the labor distribution summary file and
disbursements voucher file and updates general file.

THE CONCEPTUAL FIXED ASSET SYSTEM

Fixed Asset
- the property, plant and equipment used in the operation of a business.
- Relatively permanent items that often collectively represent the largest financial
investment by the organization.
-
Fixed Asset System
- processes transactions pertaining to the acquisition, maintenance and disposal of
its fixed assets.

Objectives of the fixed asset system.

1. Process the acquisition of fixed assets as needed and in accordance with
formal management approval and procedures.

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CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset 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.

Differences of Expenditure Cycle And Fixed Asset System

Fixed Asset Expenditure
System Cycle of
Inventories
Acquisiti Processes Processes
ons nonroutine routine
transactions for transactions of
a wider group of raw material
users in the and finished
organization; goods
inventories;

The
transactions
occur with less The
regularity than transactions
inventory occur with
acquisitions; regularity;

Transactions are Organizations

unique thus often
require specific automate the
management authorization
approval and procedures for
explicit routine
authorization acquisitions of
procedures inventories
Accounti Organizations Organizations
ng capitalize fixed treat inventory
Treatme assets that acquisitions as
nt yield benefits an expense of
for multiple the current

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CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

periods. period.

The Logic of a Fixed Asset System

Three Categories of Tasks.

1. Asset Acquisition
- Begins with the departmental manager (user) recognizing the need to obtain a new
asset or replace an existing one.
o Department managers typically have authority to approve purchases
below a certain materiality limit. Expenditures above the limit will require
approval of the higher management levels.
- Next, once the request is approved, the supplier is selected.
- Then, the receiving department delivers the asset into the custody of the
user/manager.
- Lastly, the fixed asset department performs the record-keeping function.

2. Asset Maintenance
- Involves adjusting the fixed asset subsidiary account balances as the assets
(excluding land) depreciate over time or with usage.
- Involves adjusting asset accounts to reflect the cost of physical improvements that
increase the assets value or extend its useful life.
- it must promote accountability by keeping track of the physical location of each
asset.
o Depreciation calculations are transactions that the fixed asset system
must be designed to anticipate internally when no external event (source
document) triggers the action. The depreciation schedule is the important
record that initiates this task.
o Depreciation Schedule shows when and how much depreciation to
record. It also shows when to stop taking depreciation on fully depreciated
assets.

3. 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.
- the disposal of an asset requires proper approval.

Disposal options open to the firm:

1. to sell
2. to scarp
3. to donate
4. or to retire the asset in place.

*Disposal Report
- describes the final disposition of the asset

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CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

- sent to the fixed asset accounting department to authorize the removal from the
ledger.

THE PHYSICAL FIXED ASSET SYSTEM

Computer-Based Fixed Asset System

Asset Acquisition Procedures

- The fixed asset accounting clerk receives a receiving report and a cash
disbursement voucher. These documents provide evidence that the firm has
physically received the asset and show its cost.
- The clerk creates a fixed asset record in the fixed asset subsidiary ledger.
- The Fixed Asset System
automatically updates the fixed asset control account in the general ledger and
prepares journal vouchers for the general department
produces fixed asset status reports for accounting management
the system prepares a depreciation schedule for each asset when its
acquisition is originally recorded

Asset Maintenance
- The fixed asset system uses the depreciation schedules to record end-of-period
depreciation transactions automatically.
Calculating the current periods depreciation
Updating the accumulated depreciation and book value fields in the subsidiary
records
Posting the total amount of depreciation to the affected general ledger accounts
Recording the depreciation transaction by adding the a record to the journal
voucher file
- Fixed asset depreciation report is sent to the fixed asset department for review.
- From a computer terminal, a clerk records changes in the custody or status of
assets in the fixed asset subsidiary ledger.

Asset Disposal Procedures

- The fixed asset accounting clerk receives a disposal report which formally
authorizes the fixed asset department to remove from the ledger an asset disposed
of by the user department.
- When the clerk deletes the record from the fixed asset subsidiary ledger, the
system automatically:
Posts an adjusting entry to the fixed asset control account in the general ledger
Records any loss or gain associated with the disposal
Prepares a journal voucher
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CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

- A fixed asset report containing details of the deletion is sent to the fixed asset
department for review.

Controlling the Fixed Asset System

Authorization
- Transaction should be initiated by a written request from the user department
- In case of high-value items, there should be an independent approval process that
evaluates the merits of the request on a cost-benefit basis
Supervision
- Capital Assets are more susceptible to theft and misappropriation than inventories
since they are widely distributed throughout the organization
- important element in the physical security of the fixed assets
- To ensure that the assets are being used in accordance with the organizations
policies and business practices.

Independent verification
- Internal auditor should review and verify the following:
the asset acquisition and approval procedures
the location, condition, and fair value of the organizations fixed assets against
the fixed asset records in the subsidiary ledger
automatic depreciation charges calculated by the fixed asset system

======= Prayer for Strength ======

Lord, if at times the anxiety eats me up
the frustrations weakens my heart
the workload displays the limits that I have
and all the circumstances and situation I have right now seems to lead away from the
goals that I have,
Lord, remind me that You are the God who created this universe from nothing;
You are my God who comforts
You are my God who brings hope.
You are my Fountain of strength and love
You are the God who knows me by name who have planned and created great things to
come my way.
Lord, remind me that it is through my weakness that Your greatness and love is
perfected.
I need only call upon Your Gracious Name.
===========================================

============== #CPA2017 Prayer=============

Lord, guide me through my journey of becoming a CPA.
I pray for sustenaince, intelligence, patience, diligence and determination to study all the
lessons, concepts and topics and retain all my heart,

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CHAPTER 6: The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

So that I, together with my batchmates 2016-2017, will be ready for the CPA Board
Exams October 2017.
Lord, I am claiming that I, together with the 123 batchmates that I have, will become a
CPA on October 2017.
This I ask and pray, in the name of our Lord Jesus Christ.
AMEN.
=============================================

What if Your blessings come through raindrops?

What if Your healing comes through tears?
What if a thousand sleepless nights are what it takes to know Youre near?
What if the trials of this life, the rain, the stroms, the hardest nights, are Your mercies in
disguise? Laura Story, Blessings (see Tippy Dos Santos Cover)

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