Page 295 - Accounting Information Systems

266 PART II Transaction Cycles and Business Processes

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 in-
ventory items. Payroll procedures, however, differ greatly among classes of employees. For example,
different procedures are needed for hourly employees, salaried employees, piece workers, and com-
missioned employees. Also, payroll processing requires special accounting procedures for employee
deductions and withholdings for taxes that do not apply to trade accounts.
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 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, 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
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. Figure 6-2 shows a personnel action form
used to advise payroll of an increase in an employee’s salary.

Production Department
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. Cost accounting uses these documents to
allocate direct labor charges to work-in-process (WIP) accounts. Time cards capture the time the em-
ployee is at work. These are sent to the prepare payroll function for calculating the amount of the employ-
ee’s paycheck. Figure 6-3 illustrates a job ticket, and Figure 6-4 illustrates a time card.
Each day at the beginning of the shift, employees place their time cards in a special clock that records
the time. Typically, they clock out for lunch and at the end of the shift. This time card is the formal record
of daily attendance. At the end of the week, the supervisor reviews, signs, and sends the time cards to the
payroll department.

Update WIP Account
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.

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 then performs the following tasks.

1. Prepares the payroll register (Figure 6-5) showing gross pay, deductions, overtime pay, and net pay.
2. Enters the this information into the employee payroll records (Figure 6-6).