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