Module 6: The Human Resources Management and Payroll Cycle
The human resources management (HRM)/ payroll cycle is a recurring set of business activities and
related data processing operations associated with effectively managing the employee workforce. The
more important tasks include the following: recruiting and hiring new employees, training, job
assignment, compensation (payroll), performance evaluation, and discharge of employees due to
voluntary or involuntary termination.
The HRM-related activities and the collection of information about the use of employee time occur daily.
The actual processing of payroll occurs only periodically because in most organizations’ employees are
paid on a weekly, biweekly, or monthly basis rather than every day.
The HRM/payroll master database provide descriptive information. To more effectively use employees’
knowledge and skills, many organizations have invested in knowledge management systems. Knowledge
management systems not only serve as a directory identifying the areas of expertise possessed by
individual employees, but also capture and store that knowledge so that it can be shared and used by
others. These systems can significantly improve productivity.
The payroll system has five major sources of inputs. The HRM department provides information about
hiring, terminations, and pay-rate changes due to raises and promotions. The checks are the payroll
system’s principal output. Employees receive individual pay checks in compensation for their services. A
payroll check is sent to the bank to transfer funds from the company’s regular accounts to its payroll
account. The payroll system produces a variety of reports for internal and external use.
We explain the controls necessary to ensure not only the reliability of that information but also the
safeguarding of the organization’s resources.
Update payroll master database. An organization need to update their master database to
reflect various types of internally initiated changes. It’s also necessary to reflect changes in tax
rates and deductions for insurance.
Validate time and attendance data. For employees paid on an hourly basis, many companies use
a time card to record the employee’s daily arrival and departure times. Professionals in such
service organizations as accounting, law, and consulting firms similarly track the time they spend
performing various tasks and for which clients, recording that data on time sheets. Their
employers use the time sheets to assign costs and accurately bill clients for services provided.
Prepare payroll.
Every employee receives a few documents.
Payroll register. This register lists each employee’s gross pay, pay deductions, and net pay in a
multicolumn format.
Deduction register. This register lists the miscellaneous voluntary deductions for each employee.
Earnings statement. This statement lists the amount of gross pay, deductions, and net pay for
the current period and year-to-date totals for each category.
Disburse payroll. Most employees are paid either by check or by direct deposit of the net pay
amount into their personal bank account. Both methods provide a means to document the
amount of wages paid.
Calculate and disburse employer-paid benefit taxes and voluntary employees deductions. This is
the final payroll activity. Many employers offer their employees flexible benefit plans, under
which each employee chooses some minimum coverage in medical insurance, retirement plans,
and charitable contributions. Flexible benefit plans place increased demands on a company’s
HRM/payroll system.
There are three types of data processing integrity controls that can mitigate the threat of payroll errors.
Batch totals. If the original and subsequent hash totals of employees numbers agree, it means
that all payroll records have been processed. It also means that data input was accurate, and no
bogus time cards were entered during processing.
Cross footing the payroll register. The total of the net pay column should equal the total of gross
pay less total deductions. If it does not, an error occurred in processing that needs to be
promptly investigated and corrected.
A payroll clearing account. This is a general ledger account that is used in a two-step process to
check the accuracy and completeness of recording payroll costs and their subsequent allocation
to appropriate cost centers.
A payroll service bureau maintains the payroll master data for each of its clients and process payroll for
them. A professional employer organization (PEO) not only processes payroll, but also provides HRM
services. Payroll service bureaus are generally less expensive than PEO’s, because they provide a
narrower range of services.
Payroll services bureaus and PEOs are especially attractive to small and midsized businesses for the
following reasons.
Reduced costs. They both benefit from the economies of scale associated with preparing pay
checks for a large number of companies.
Wider range of benefits. PEOs pool the costs of administering benefits across all their clients. A
PEO enables smaller companies to offer the same wide range of benefits that large companies
typically provide.
Freeing up of computer resources. A payroll service bureau or PEO eliminates one or more AIS
applications. The freed-up computing resources can then be used to improve service in other
areas.
Steps in the Payroll Cycle
A business must have a payroll process in place to ensure employees receive correct pay on time. While
the exact payroll procedures vary by company, the basic payroll cycle covers tasks most businesses must
do to process their payrolls. The scope and frequency of payroll processing depends on many factors,
including the size of the business and the payment cycle.
Information Updating
The payroll administrator must add new or revise existing employee data before running payroll. For
example, the administrator must create an employee payroll profile for a new hire. The profile includes
her personal information, such as her Social Security number and payment details, her tax information
and pretax deductions, such as health insurance premiums. If an existing employee has had any
information changes, such as a new pay rate, the administrator must make these changes before
running payroll.
Calculation of Time
The administrator must calculate employees' work time for payment purposes using the company's
method of timekeeping. If the timekeeping is manual, the administrator has to add the hours together
herself. If the company uses automated timekeeping, such an electronic time card, the person
responsible for approving the hours usually just has to confirm the time shown is correct for payroll
processing and fix any errors before final approval.
Benefit and Deduction Application
An electronic payroll system usually has applicable pretax work benefits, such as dental premiums,
federal and local taxes and pay rates, already inputted. Once the responsible person verifies the
employee's hours, the payroll system calculates her net wages using the inputted figures. The payroll
administrator must figure out these calculations herself if the payroll system is manual, using
information from the employee's file or the company's payroll records.
Payment Processing Confirmation
The administrator checks the direct deposit or paycheck amounts to confirm all the information is
correct once payroll is set. He confirms the amounts a second time after sending the direct deposit or
printing the employee checks. The administrator can usually print out or view reports if the payroll is
automated. A person running a manual payroll must double-check using an applicable method, such as
directly confirming direct deposit transmissions with the company's bank.
Accounting
The administrator must address other payroll-related matters, such as the deposit of withheld taxes to
the correct place, after the employees receive their pay. What happens next depends on the company's
payroll practices. For example, a company may send payroll reports and withheld taxes to a third party
they've hired to handle tax deposits and payments.
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