CHAPTER 21: MANAGING PAYROLL AND
INVENTORY
21.2 LEARNING OBJECTIVES Identify 6 steps in managing payroll
system Describe the common methods of
paying employees Discuss required and voluntary payroll
deductions Identify accounts used in recording
payroll
STEPS IN THE PAYROLL SYSTEM1. Calculate total earnings of each
employee2. Calculate deductions3. Prepare payroll records4. Prepare a paycheck for each employee5. Record payroll in the accounting
system
IMPORTANCE OF PAYROLL RECORDS Payroll: list of employees and the
payments due to each one for a specific amount of time
Each specific amount of time called pay period
2 most common pay periods are weekly and bi-weekly (some pay 1 time per month)
Payroll system makes sure People paid on time Have correct amounts on their paychecks
2 major goals of a business when setting up a payroll system: Collect and process all info needed to
prepare and issue paychecks Maintain payroll records needed for
accounting and prepare reports for government agencies
What you need to complete each pay period if you work in payroll:
Calculate gross earnings Calculate payroll deductions Prepare payroll records Prepare paychecks Record payroll info in accounting records Report payroll to government
CALCULATING GROSS EARNINGS Gross earnings: the total amount of
money an employee earns in a pay period
3 of the most common methods of paying employees Salary Hourly Salary + commission
SALARY Salary: a fixed amount of money paid
to an employee for each pay period, no matter how many hours they work
Paid to managers and supervisors
HOURLY A specific amount of money paid per
hour to an employee Part-time jobs and entry-level full time
jobs Gross earnings can change week to
week Time card is used to keep track of
accuracy
OVERTIME PAY The amount paid above the normal
hourly rate Usually it is 1.5 times the normal rate
4 steps: Find out how much they made for first 40
hours Multiply hourly rate by 1.5 to get OT rate Multiply OT rate by # hours worked over
40 Add together
COMMISSION An amount of money paid to an
employee based on a percentage of their sales
The more they sell, the more they make
3 steps Calculate weekly or bi-weekly gross pay Multiply commission percentage by total
sales $$ Add together
CALCULATING PAYROLL DEDUCTIONS Various amounts that are subtracted
from an employee’s gross earnings Some are required by your city or state
or fed. Some you sign up for voluntarily
REQUIRED DEDUCTIONS Federal income tax—based on how much you
make; the more allowances you have, (adjustments) the less tax withheld EX: single person claims 0 or 1; married person could
claim more FICA (federal insurance contributions act)
Social security tax —provides retirement, disability (6.2%)
Medicare tax —contributes to elderly insurance (1.45%)
State and local income taxes Percentage of your gross earnings
VOLUNTARY DEDUCTIONS Only if you request them
Health or life insurance Charity contributions Union dues Pensions/retirement plans (401k) Direct deposits into bank account
PREPARING PAYROLL RECORDS To keep accurate payroll records, you
are expected to: Calculate earnings and deductions
correctly Distribute employee paychecks on time Keep accurate and safe records Pay taxes owed to government agencies
on time File all payroll reports to government on
time
PREPARING PAYROLL REGISTER Record that summarizes information
about employee earnings and deductions for each pay period
3 main sections: Earnings (records regular pay, OT and
gross) Deductions (required & voluntary each pay
period) Net pay (amount that is leftover—take
home)
PREPARING PAYCHECKS You receive a printed explanation of
how your net pay is calculated (paystub)
Direct deposit: automatically deposited into account on payday You still receive a paystub Funds available faster, don’t lose check Reduce expenses of paper, manual labor
RECORDING PAYROLL INFORMATION1. The salaries expense account
Total gross earnings: total amount you pay to your employees before any deductions are taken out
2. Deductions to Liabilities Liabilities are identified on the account by
the word PAYABLE They remain liabilities until business
makes required payments to the government, insurance, etc.
CASH IN BANK Last account to be affected by payroll The account that records all the cash
that enters and leaves the business
Reduced as you make payments on your payroll liabilities
EMPLOYER’S PAYROLL TAXES Employers must match what you
contribute to FICA (if you pay $25, they must pay $25)
Employers must also match medicare Employers pays federal and state
unemployment taxes Amount of $$ a business owes the
government is outlined in the IRC—internal revenue code
IRC The IRC addresses a number of issues:
Determine if federal tax coverage rules apply
Computing an employee’s taxable wages Calculating amount of taxes to withhold Deposit correct amount of taxes with
government Filing employment tax returns
21.2 LEARNING OBJECTIVES Identify information needed for an
inventory control system Summarize methods of determining
inventory quantity Explain methods used to calculate cost
of inventory Analyze inventory turnover
MANAGING AN INVENTORY SYSTEM In order to control the purchase and sale of
merchandise for your business, you must have an effective system of inventory
4 stages of merchandise Ordering merchandise (order when current
inventory runs low in order to meet demand) Storing merchandise (stored safely) Displaying merchandise (in an appealing way) Selling merchandise (brings in cash for business
and reduces inventory)
DETERMINING AMOUNT OF INVENTORY There are 2 accounting methods used to
determine how much inventory is in stock: Perpetual inventory system: keeps constant, up
to date record of merchandise on hand. When items are sold, they are deducted from inventory
Point of sale terminals: electronic cash registers linked to a central computer that keeps track of sales
Periodic inventory system: inventory records are updated only after someone makes an actual, physical count of the merchandise on hand. You count everything, then update inventory
DETERMINING COST OF INVENTORY Specific identification method: exact cost of each
item is determined and assigned to each item. Actual cost of each item obtained from the invoice. Most accurate costing method
First-in, first-out method (FIFO): assumes the first items purchased (first in) are the first items sold (first out). Recent purchases to go the back of the line.
Last-in, first-out method (LIFO): assumes last items purchased as the first to be sold
CHAPTER 21 REVIEW ACTIVITIES Reviewing key concepts #1-7 Your financial figures #1 Math review problems Worksheet page 247, 250-51
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