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CHAPTE R 6 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset Procedures 281

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 pro-
duce adequate records for independent verification and audit purposes. Also, controls must be imple-
mented 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 rela-
tively permanent items that often collectively represent the largest financial investment by the organiza-
tion. 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 ap-
proval 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.
The fixed asset system shares some characteristics with the expenditure cycle presented in Chapter 5,
but two important differences distinguish these systems. First, the expenditure cycle processes routine
acquisitions of raw material and finished goods inventories. The fixed asset system processes nonroutine
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. Because fixed asset transactions are unique, they require specific manage-
ment approval and explicit authorization procedures. In contrast, organizations often automate the autho-
rization procedures for routine acquisitions of inventories.
The second difference between these systems is that organizations usually treat inventory acquisitions
as an expense of the current period, while they capitalize fixed assets that yield benefits for multiple peri-
ods. Because the productive life of a fixed asset extends beyond one year, its acquisition cost is appor-
tioned 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 procedures 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 noteworthy differences. First, the