The 6 Steps of the Payroll Cycle

Summary

This video outlines the six steps of the payroll cycle, beginning with the hiring or firing of employees by the HR department. It details the importance of updating the payroll system, accurately tracking employee hours, and managing payroll accounting to calculate gross pay and deductions. The process includes payroll distribution, where employees receive their net pay, followed by the recording of journal entries for financial reporting. Each step is crucial for ensuring accurate employee compensation and maintaining the integrity of the company’s financial records.

Takeaways

• 👥 Takeaway 1: The payroll cycle begins with the hiring or firing of an employee, managed by the HR department.
• 📂 Takeaway 2: Updating the payroll system is crucial; newly hired employees must be added, while terminated employees should be removed.
• 🕒 Takeaway 3: Timekeeping is essential for hourly employees, with various methods for tracking hours worked.
• 🔍 Takeaway 4: Accurate coding of hours worked helps allocate costs appropriately, affecting financial reports.
• 💰 Takeaway 5: Payroll accounting involves calculating gross pay, deductions, and net pay, which can be complex.
• 📊 Takeaway 6: Common deductions include taxes, retirement contributions, and garnishments, requiring careful calculation.
• 🏦 Takeaway 7: Payroll distribution ensures employees receive their pay on time, either through checks or direct deposits.
• 📝 Takeaway 8: Recording journal entries is necessary for accurate financial reporting and bookkeeping.
• 🔄 Takeaway 9: Some companies may outsource payroll processing to ensure accuracy and compliance with regulations.
• 🧾 Takeaway 10: The payroll cycle is vital for maintaining accurate financial records and ensuring employee satisfaction.

Q & A

What are the six steps of the payroll cycle?

The six steps are hiring or firing an employee, updating the payroll system, timekeeping and supervision, payroll accounting, payroll distribution, and recording a journal entry.

Who is responsible for hiring and firing employees in a large company?

In a large company, the human resources department handles the hiring and firing of employees.

What is the importance of updating the payroll system?

Updating the payroll system is crucial to ensure that newly hired employees are added and terminated employees are removed, preventing incorrect payments.

How do companies typically track hours for hourly employees?

Companies often use time sheets, time cards, or electronic systems to track the hours worked by hourly employees.

What deductions might be taken from an employee's gross pay?

Deductions can include taxes, garnishments, retirement contributions, medical insurance premiums, and union dues.

What is the difference between gross pay and net pay?

Gross pay is the total amount earned before any deductions, while net pay is the amount the employee actually receives after deductions.

Why might a company choose to outsource payroll processing?

A company may outsource payroll processing to ensure accuracy and compliance with tax laws, as payroll calculations can be complex.

What are the methods of payroll distribution mentioned in the video?

Payroll can be distributed through physical checks or direct deposits into employees' bank accounts.

What is the purpose of recording a journal entry for payroll?

Recording a journal entry for payroll is necessary for financial reporting and bookkeeping, reflecting all payroll-related expenses and liabilities.

How can the payroll journal entry be complex for larger companies?

In larger companies, the payroll journal entry can be lengthy due to the need to code different types of pay and account for various payroll liabilities.