The Expenditure Cycle Part II:

• Payroll Processing
• Fixed Asset Procedures
 The Expenditure Cycle Part II
Payroll Processing:
• Payroll processing is actually a special-case purchases
system in which the organization purchases labor
rather than raw materials or finished goods for resale.
Fixed asset systems:
• Fixed assets are the property, plant, and equipment
used in the operation of a business. . This discussion
focuses on processes pertaining to the acquisition,
maintenance, and disposal of its fixed assets.
• 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.
• 2. General expenditure activities constitute a relatively steady stream
of purchasing and disbursing transactions. Payroll activities, on the
other hand, are discrete events in which disbursements to
employees occur weekly, biweekly, 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.
• Although specific payroll procedures vary among firms,
the key points of the general process are described below:

1. 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.
2. 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. And time cards - used to capture the
total time worked each pay period for payroll
calculations .
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must be signed by a supervisor.
3. After cost accounting allocates labor costs to the WIP
accounts, the charges are summarized in a labor
distribution summary and forwarded to the general
ledger function.
4. 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 then performs the following tasks
i) Prepares the payroll register and payroll records.
ii) Prepares employee paychecks and sends the
paychecks to the distribute paycheck function.
iii) Finally files the time cards, personnel action form,
and copy of the payroll register.
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5. A form of payroll fraud involves submitting time cards for
nonexistent employees. To prevent this, many companies
use a paymaster to distribute the paychecks to employees.
This individual is independent of the payroll process—not
involved in payroll authorization or preparation tasks.
6. 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.
7. Upon receipt of the voucher packet, the cash
disbursements function prepares a single check for the
entire amount of the payroll and deposits it in the payroll
imprest account.
8. The general ledger function receives the labor distribution
summary from cost accounting, the disbursement voucher
from AP and updated.

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• In accounting, an imprest system typically involves the
management and monitoring of petty cash.

• An imprest payroll account is an account set up to

receive the exact amount of the funds needed to
make payroll for a given pay period. No additional
funds reside in this account. Once a company direct
deposits funds or disburses payroll checks for
employees who then cash their checks, the account
balance on an imprest payroll account drops to a zero
balance. Companies do not deposit any other types of
funds into the account.
• Payroll Controls:

i) Transaction authorization
ii) Segregation of Duties
iii) Supervision
iv) Accounting Records
v) Access Controls - need to prevent
employees from having improper access to
accounting records and unsigned checks.
vi) Independent Verification

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 • Manual Payroll System:
• The following key tasks of a manual system are:
1. Payroll authorization and hours worked enter the payroll
department from two different sources: personnel and
production.
2. The payroll department reconciles this information, calculates
the payroll, and distributes paychecks to the employees.
3. Cost accounting receives information regarding the time spent
on each job from production. This is used for posting to WIP
account.
4. AP receives payroll summary information from the payroll
department and authorizes the cash disbursements department
to deposit a single check, in the amount of the total payroll, in a
bank imprest account on which the payroll is drawn.
 Computer-Based Payroll Systems
• Payroll is well-suited to batch processing and
sequential files.
– Most employees on the master file receive
paychecks periodically.
• The computer program performs the detailed
record-keeping, check-writing, and general
ledger functions.

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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. 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.
• 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.
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• 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 Fixed Asset System (FAS)
• 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.
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• The fixed asset system processes non-routine transactions
for a wider group of users in the organization. Managers
in virtually all functional areas of the organization make
capital investments in fixed assets, but these transactions
occur with less regularity than inventory acquisitions.
• Organizations 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.
 Life of a Fixed Asset
2. Depreciation.
1. Acquisition 4. Disposal
3. Subsequent
of asset. of asset.
expenditures.
Asset
cost $
Dec
line
i n as
set ’
s se
rv ice
p ote
ntia
l
Cost Salvage
value
Time (useful life)
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 1. Asset Acquisition
• Begins when a dept. manager determines that
an old fixed asset needs to be replaced or that
a new fixed asset is warranted
• A purchase requisition is filled out.
– May require an authorizing signature for items over
a pre-specified limit
• FAS dept. performs record-keeping functions.

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 2. Asset Maintenance

• Involves adjusting FAS subsidiary account

balances as assets depreciate
• Depreciation calculations are internal
transactions that the FAS system bases upon a
depreciation schedule.
• Physical improvements must also be recorded to
increase the subsidiary account balance and
depreciation schedule.
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 3. Asset Disposal
• At the end of an asset’s useful life (or earlier
disposition), the asset must be removed from
the records and depreciation schedule
• Disposals require disposal request forms and
disposal reports as source documents.

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 Computer-Based Fixed Asset System—
Acquisition

• Receipt of assets are digitally recorded in the

system, along with information such as its
useful life, depreciation methods, etc.
• Ledgers are automatically updated

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 Computer-Based Fixed Asset System—
Maintenance
• Computerized FAS automatically:
– calculate current period’s depreciation
– update accumulated depreciation and book-value
fields in the subsidiary records
– post total depreciation to the affected general
ledger accounts
– record depreciation transactions by adding records
to the journal voucher file
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 Computer-Based Fixed Asset System—
Disposal

• Computerized FAS automatically:

– post adjusting entries to the fixed asset control
account in the general ledger
– record losses or gains associated with the
disposal transaction
– prepare journal voucher records

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 FAS Controls
• Authorization - should be formal and explicit
because of high cost of FAS:
– acquisitions
– changes in depreciation methods
• Supervision - threat of misappropriation
requires constant management oversight:
– theft - secure physical locations of assets
– misuse - monitor on-the-job activities
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 FAS Controls
• Independent Verification - internal auditors
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)

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