300

FIGURE 6-10 Payroll System with Real-Time Elements

Cost

Chapter 6
Personnel Accounting Time-Keeping Data Processing

Real-Time Processing
Terminal

Job Human
Tickets Resource Labor
Labor

The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures
Management Usage File
Usage File

Terminal
Employee Attendance Post to WIP Accounts
File and Prepare Labor Cost
Time File
Dist Summary Accounting Files
Cards

Labor Dist
Summary Cost Acctg
Batch Process
Labor Dist
Summary
Terminal
Payroll
Processing
Voucher Labor Dist
File Summary Gen Ledger
Payroll Accts Pay
Register
Payroll
Register Cash Disb
Payroll
Master File Paycheck
Update
Voucher General
Gen Ledger General
Funds Ledger
Ledger
Transfer
Check
Payroll
Register

Voucher

Voucher

Voucher
File

Accts Pay
Part II Transaction Cycles and Business Processes 301

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.3
6. The disbursement voucher file is updated and a check is prepared for the funds trans-
fer 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-
eral 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 disbursements voucher file and updates the general ledger file.

Control Implications
The real-time features of the payroll system provide many of the operational benefits
discussed earlier, including reductions in paper, clerical labor, and the lag time between
event occurrence and recording them. As mentioned before, these features carry control
implications. Computer-based systems must produce adequate records for independent
verification and audit purposes. Also, controls must be implemented to protect against
unauthorized access to data files and computer programs.

The Conceptual Fixed Asset System

Fixed assets are the property, plant, and equipment used in the operation of a business.
These are relatively permanent items that often collectively represent the largest financial
investment by the organization. Examples of fixed assets include land, buildings, furni-
ture, 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 man-
agement 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.

3 For added internal control, many companies encourage their employees to have their checks directly
deposited into their bank accounts.
302 Chapter 6 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

The fixed asset system shares some characteristics with the expenditure cycle presented
in Chapter 5, but two important differences distinguish these systems. First, the expen-
diture cycle processes routine acquisitions of raw material and finished goods inven-
tories. The fixed asset system processes nonroutine transactions for a wider group of
users in the organization. Managers in virtually all functional areas of the organiza-
tion make capital investments in fixed assets, but these transactions occur with less
regularity than inventory acquisitions. Because fixed asset transactions are unique,
they require specific management approval and explicit authorization procedures. In
contrast, organizations often automate the authorization procedures for routine acqui-
sitions of inventories.
The second difference between these systems is that organizations usually treat inven-
tory acquisitions as an expense of the current period, while they capitalize fixed assets
that yield benefits for multiple periods. Because the productive life of a fixed asset extends
beyond one year, its acquisition cost is apportioned over its lifetime and depreciated in
accordance with accounting conventions and statutory requirements. Therefore, fixed
asset accounting systems include cost allocation and matching procedures that are not
part of routine expenditure systems.

The Logic of a Fixed Asset System

Figure 6-11 presents the general logic of the fixed asset system. The process involves three
categories of tasks: asset acquisition, asset maintenance, and asset disposal.

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 pro-
cedures over the transaction will depend on the asset’s value. Department managers
typically have authority to approve purchases below a certain materiality limit. Capital
expenditures above the limit will require approval from the higher management levels.
This may involve a formal cost-benefit analysis and the formal solicitation of bids from
suppliers.
Once the request is approved and a supplier is selected, the fixed asset acquisition
task is similar to the expenditure cycle procedures described in Chapter 5, with two note-
worthy differences. First, the receiving department delivers the asset into the custody of
the user/manager rather than a central store or warehouse. Second, the fixed asset depart-
ment, not inventory control, performs the record-keeping function.

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 meth-
ods in use are straight line, sum-of-the-years’ digits, double-declining balance, and units
of production. The method of depreciation and the period used should reflect, as closely
as possible, the asset’s actual decline in utility to the firm. Accounting conventions and
IRS rules sometimes specify the depreciation method to be used. For example, businesses
must depreciate new office buildings using the straight-line method and use a period of at
least 40 years. The depreciation of fixed assets used to manufacture products is charged
to manufacturing overhead and then allocated to WIP. Depreciation charges from assets
not used in manufacturing are treated as expenses in the current period.
 Part II
FIGURE 6-11 DFD for Fixed Asset System

Asset Acquisition

Transaction Cycles and Business Processes

Purchase 1
User
Requisition Accounts Payable
Department
Sub Ledger
Authorization 6
Procedures Post

Post
Cash
Purchase Disbursements
Payment

Approval 4 Authorize Check

Payment Register
Accounts
2 Payable
Purchase
Asset

Order
Purchase Order
Purchasing

Asset Cost Data

Receiving Report
General
Ledger

Vendor Supplier's Invoice

Post

Packing Slip 3 Journal Voucher

7
Journal Voucher
Receiving General
5 Ledger
Journal Voucher
Process
Receiving
Report Fixed Asset
Accounting
Asset Disposal Disposal Report Asset
Maintenance
Post
8
Asset
Disposal Disposal
Changes
User Request Approval
Authorization Disposal Fixed Asset
Department User
Process Sub Ledger
Department
Depreciation
Schedule

303
304 Chapter 6 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures

Depreciation calculations are transactions that the fixed asset system must be designed
to anticipate internally when no external event (source document) triggers the action.
An important record used to initiate this task is the depreciation schedule. A separate
depreciation schedule, such as the one illustrated in Figure 6-12, will be prepared by the
system for each fixed asset in the fixed asset subsidiary ledger.

FIGURE 6-12 Depreciation Schedule

OZMENT’S INDUSTRIAL SUPPLY

ASSET LISTING WITH DEPRECIATION SCHEDULES
FROM 200 THROUGH 200

Code Type Description Month# Depn. exp. Acc. depn. Book value

200 OFF&F
OFFICE FURNITURE
Depn. method: SYD
Life in years: 5
Date acquired 2/01/08
Date retired
Cost 5,500.00
Residual 500.00
Acc. Depn. 2,222.23
1 138.89 138.89 5,361.11
2 138.89 277.78 5,222.22
3 138.89 416.67 5,083.33
4 138.89 555.56 4,944.44
5 138.89 694.45 4,805.55
6 138.89 833.34 4,666.66
7 138.89 972.23 4,527.77
8 138.89 1,111.12 4,388.88
9 138.89 1,250.01 4,249.99
10 138.89 1,388.90 4,111.10
• • • •
• • • •
• • • •
52 27.78 4,777.80 722.20
53 27.78 4,805.58 694.42
54 27.78 4,833.36 666.64
55 27.78 4,861.14 638.86
56 27.78 4,888.92 611.08
57 27.78 4,916.70 583.30
58 27.78 4,944.48 555.52
59 27.78 4,972.26 527.74
60 27.78 5,000.04 499.96

Assets listed: 1
Part II Transaction Cycles and Business Processes 305

A depreciation schedule shows when and how much depreciation to record. It also
shows when to stop taking depreciation on fully depreciated assets. This information in a
management report is also useful for planning asset retirement and replacement.
Asset maintenance also involves adjusting asset accounts to reflect the cost of physi-
cal improvements that increase the asset’s value or extend its useful life. Such enhance-
ments, which are themselves capital investments, are processed as new asset acquisitions.
Finally, the fixed asset system must promote accountability by keeping track of the
physical location of each asset. Unlike inventories, which are usually consolidated in
secure areas, fixed assets are distributed throughout the organization and are subject to
risk from theft and misappropriation. When one department transfers custody of an asset
to another department, information about the transfer should be recorded in the fixed
asset subsidiary ledger. Each subsidiary record should indicate the current location of the
asset. The ability to locate and verify the physical existence of fixed assets is an important
component of the audit trail.

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 bot-
tom left portion of Figure 6-11 illustrates the asset disposal process. It begins when the
responsible manager issues a request to dispose of the asset. Like any other transaction,
the disposal of an asset requires proper approval. The disposal options open to the firm
are to sell, scrap, donate, or retire the asset in place. A disposal report describing the final
disposition of the asset is sent to the fixed asset accounting department to authorize its
removal from the ledger.

The Physical Fixed Asset System

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 cen-
ter 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.

Acquisition Procedures
The process begins when the fixed asset accounting clerk receives a receiving report and
a cash disbursement voucher. These documents provide evidence that the firm has physi-
cally received the asset and show its cost. From the computer terminal, a clerk creates a
record of the asset in the fixed asset subsidiary ledger. Figure 6-14 presents a possible
record structure for this file.
Notice that in addition to the historic cost information, the record contains data
specifying the asset’s useful life, its salvage (residual) value, the depreciation method to be
used, and the asset’s location in the organization.
The fixed asset system automatically updates the fixed asset control account in the
general ledger and prepares journal vouchers for the general ledger department as evidence