The human resources management and payroll cycle - Chapter 15


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.

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