Payroll Cycle

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Human Resources Cycle

ACC 444 Enterprise Process Analysis

1

INTRODUCTION

The most important tasks performed in the HRM/payroll cycle are:

Recruiting and hiring new employees

Training

Job assignment

Compensation (payroll) Performance evaluation

Discharge of employees (voluntarily or involuntarily)

In most companies these six activities are split between a payrollsystem and an HRM system:

The payroll system handles compensation

The HRM system handles the other five tasks


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2

INTRODUCTION

In this chapter, well focus primarily on the payroll system

The seven basic activities in the payroll cycle are:

Update payroll master file

Update tax rates and deductions Validate time and attendance data

Prepare payroll

Disburse payroll

Calculate employer-paid benefits and taxes Disburse payroll taxes and miscellaneous deductions


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3

UPDATE PAYROLL MASTER FILE

The HRM department provides information on new hires,terminations, changes in pay rates, and changes in discretionarywithholdings.

Appropriate edit checks, such as validity checks on employeenumber and reasonableness tests are applied to all changetransactions.

Changes must be entered in a timely manner and reflected in thenext pay period.

Records of terminated employees should not be deleted

immediately as some year-end reports (e.g., W-2s) require dataon compensation for all employees during the year.


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UPDATE TAX RATES AND DEDUCTIONS

The payroll department receives notification ofchanges in tax rates and other payroll deductionsfrom government agencies, insurers, unions, etc.

These changes occur periodically.


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VALIDATE TIME AND ATTENDANCE DATA

Information on time and attendance comes in various forms depending on theemployees pay scheme.

Some employees are paid on an hourly basis and therefore must record their arrivaland departure time on time cards.

Manufacturing companies may use job time tickets to record not only time presentbut also time dedicated to each job.

Some employees earn a fixed salary (e.g., managers and professional staff) and usually

dont record their time. Professionals in accounting, law, and consulting firms must track their time on various

assignments to accurately bill clients.

Sales staff are often paid on a straight commission or base salary plus commission;some may also receive bonuses for surpassing sales targets.

Increasingly, laborers may be paid partly on productivity.

Some management and employees may receive stock to motivate them to cut costsand improve service.

The payroll system needs to link to the revenue cycle and other cycles to calculate these payments.


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VALIDATE TIME AND ATTENDANCE DATA

How can information technology help?

Collecting time and attendance data electronically,e.g.:

a) Badge readersb) Electronic time clocks

c) Data entered on terminals

d) Touch-tone telephone logs

Using edit checks to verify accuracy andreasonableness when the data are entered.


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7

PREPARE PAYROLL

The employees department provides data about hours worked.

A supervisor confirms the data.

Pay rate information is obtained from the payroll master file.

Gross pay is calculated:

a) Hourly Employees: Gross pay = (hours worked x wage rate) +Overtime + Bonuses

b) Salaried Employees: Gross pay = annual salary x fraction ofyear worked

Payroll deductions are summed and subtracted from gross pay to

obtain net pay. There are two types of deductions:a) Payroll tax withholdings

b) Voluntary deductions


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PREPARE PAYROLL

The following are printed:a) Paychecks for employees--often accompanied by an

earnings statement, which lists pay detail, currentand year-to-date.

b) Apayroll registerwhich lists each employees gross

pay, deductions, and net pay (current and year-to-date) in a multi-column format

As payroll transactions are processed, labor costs areaccumulated by general ledger accounts based on codes onthe job time tickets.

The totals for each account are used as the basis for asummary journal entry to be posted to the general ledger.

Other payroll reports and government reports are produced.


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DISBURSE PAYROLL

Most employees are paid either by:

Check

Direct deposit

In some industries, such as construction, cash payments may still bemade, but does not provide good documentation

Procedures: When paychecks have been prepared, the payroll register is sent to

accounts payable for review and approval.

A disbursement voucher is prepared to authorize transfer of fundsfrom checking to the payroll bank account.

a) For control purposes, checks should not be drawn on the companysregular bank account

b) A separate account (payroll imprest account) is created for this purpose Limits the companys loss exposure Makes it easier to reconcile payroll and detect paycheck forgeries


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DISBURSE PAYROLL

The approved disbursement voucher and payroll register are sent tothe cashier. The cashier:

Reviews the documents.

Prepares and signs the payroll check to transfer the funds.

Reviews, signs, and distributes employee paychecks (whichseparates authorization and recording from distribution ofchecks).

Re-deposits unclaimed checks in the companys bankaccount.

Sends a list of these paychecks to internal audit for

investigation. Returns the payroll register to payroll department, where it

is filed with time cards and job time tickets.

Sends the disbursement voucher to accounting clerk toupdate general ledger.


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CALCULATE & DISBURSE BENEFITS ANDTAXES

The employer pays the following payroll taxes and employeebenefits that were withheld from the employees paychecks:

federal and state taxes

employees share of Social Security & Medicare tax.

voluntary deductions such as retirement contributions, healthinsurance premiums, flexible spending contributions, etc.

In addition, the employer pays:

A matching amount of Social Security

Federal and state unemployment taxes

The employer share of health, disability, and life insurancepremiums, as well as pension contributions

The company must periodically prepare checks or EFT to pay taxand other liabilities.


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OUTSOURCING OPTIONS

Many entities outsource payroll and HRM to:

Payroll service bureaus (who maintain the payroll master file andperform payroll processing activities); or

Professional employer organizations (PEOs), who also administer anddesign employee benefit plans, in addition to processing payroll

When organizations outsource payroll processing, they send the servicebureau or PEO at the end of each period:

Personnel changes Employee time and attendance data

The service bureau or PEO then:

Prepares paychecks, earnings statements, and a payroll register

Periodically produces tax documents

Outsourcing is especially attractive to small and mid-size businessesbecause:

Its often cheaper for smaller companies

The bureau or PEO may provide a wider range of benefits

It frees up the companys computer resources for other areas


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CONTROL: OBJECTIVES, THREATS,AND PROCEDURES

Following is a discussion of threats to the HRM/payrollsystem, organized around three areas:

Employment practices

Payroll processing

The major threats in the employment practices areaare:

THREAT 1: Hiring Unqualified or Larcenous

Employees

THREAT 2: Violation of Employment Law


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THREATS IN PAYROLL PROCESSING

The major threats in the payroll processing area are:

THREAT 3: Unauthorized Changes to the Payroll MasterFile

THREAT 4: Inaccurate Time Data

THREAT 5: Inaccurate Processing of Payroll THREAT 6: Theft or Fraudulent Distribution of Paychecks


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HRM and Payroll Cycle

Copyright 2012 Pearson Education, Inc. publishing asPrentice Hall

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Payroll Cycle