Payroll Accounting essay

How Accounting Information Systems has Improved payroll Accounting Abstract Payroll accounting has been greatly improved with the invention of accounting information systems (ASS). The process of payroll is a complicated one that involves many steps. From updating the employee information to printing the checks, almost all areas have been improved with the help of ASS. There are many things to keep track of when processing payroll from beginning to end.

Many larger companies have turned to outsourcing payroll services to keep up with all Of the taxes, withholdings, and other deductions, to name a few. Using a payroll provider can be helpful for small to medium sized businesses, but only if the benefit outweighs the cost of processing payroll in-house. If it is decided to process payroll in-house, there are several internal controls, such as segregation of duties, which will have to be established. These controls, if implemented correctly, can help to safeguard assets from theft and fraud.

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All aspects of business, especially payroll accounting, have been improved following the introduction of ASS. Overview of the Payroll Process The processing of payroll involves many different steps and requires a detailed process flow to avoid costly errors. It is important to use the same process each payroll period to ensure it is handled consistently on a repetitive basis. The actual process flow may vary from the standard process depending on the company and whether it uses a manual, computerized, or outsourced payroll processing system (Payroll Procedure, 2015).

Most commonly, the first step in processing payroll is to update the employee master file, if needed, to include address changes, payroll deduction changes, voluntary deductions, and new hire information for employees hired in the current pay period” (Ferguson, 2015). The next Step is to set the pay period and enter the time worked. Time worked can be found on time cards or time sheets. Some companies have computerized time clocks that can port the hours worked directly into the company’s payroll system.

If the company has a manual system of entering time worked, it will have to manually calculate the total hours worked per employee per pay period. The next step will be to enter any adjustments or any other types of income. Adjustments might include “additional pay or wage deduction due to underpayment or overpayment from a prior pay period,” and prorated pay or new or terminated employees who did not work the entire pay period (Ferguson, 2015). The next step will be to calculate pay for the period, either manually or have the software process the period and determine the amount of tax withholdings and other withholdings for the period.

The next step will be to print and review the reports to verify the payroll before printing checks. Once the analysis of reports indicates that there are not any errors, paychecks are printed, or just the bobstays if your company issues checks via direct deposit. If a company uses direct deposit, it will generate the direct opposite file and forward it to the bank. It will then contact the bank and verify that it has been received it and that the amount is correct (Ferguson, 2015). Once checks are issued, the next step is to print payroll registers showing the wages for the current pay period.

These reports will be sent to management for review and then will be filed in a confidential storage area along with the time cards for the current period. The last step of the payroll process is to deposit payroll taxes and verify the transmission to the government. Payroll before ASS Before ASS, accounting was entirely manual. When employees came into work, they wrote down what time they came in and when they left. Their version of time cards were completely manual. This could have been troublesome because of dishonest employees.

Who knows when the employee really came in to work and left from work? Unless their manager was keeping track of each employee’s time, which would have been time consuming, a company could possibly never have an accurate account of actual hours worked. Additionally, when it came time for payroll, all of the hours worked for each employee had to be calculated manually for each individual employee. This was likely extremely time-consuming for the payroll clerk. The clerk had to calculate hours worked each period manually, and keep a lot of paperwork each week to keep up with payroll.

There was likely a lot of mistakes that occurred before ASS as well as a lot of time spent on payroll. Elements to Consider When performing the payroll process, it is not only the hours worked each pay period by employees that the payroll clerk has to consider. There are many other elements that go into the payroll process including federal income tax withholdings as well as other state and local taxes, deductions both voluntary and involuntary), employee benefits such as 401 (k) and section 125 mutual fund plans, and child support (Jones, 2013).

Other aspects of consideration include overtime and vacation pay, whether certain employees are paid on an hourly, salary, or commission basis, pay rate information, and payment options such as paper check or direct deposit. There is a substantial amount of information that has to be accounted for and processed each pay period. It is up to the company’s payroll system and payroll clerk to keep all of these things straight and accurate each pay period. Payroll after AS With all the things to be considered for payroll each pay period, ASS has made keeping track of these things more efficient.

More sophisticated accounting software has allowed companies to keep better track of hours worked, pay rate, employee benefits, withholdings and deductions, vacation and overtime, etc. Some information regarding hours worked can be ported in from automatic time clocks, which saves time and money. The systems can print the checks and reports much faster than doing them by hand. ASS keeps records of past pay periods in case there was an error that needs to be investigated at a later date.

However, ASS have significantly cut down on the amount of time and money spent processing payroll, and has also cut down on the number Of errors each pay period. Some disadvantages of processing payroll with ASS include the need for accurate data entry. If data is entered incorrectly, it can throw off a whole set of data within payroll. With ASS, there also comes the “danger of hackers stealing data” (Maggots, n. D. ). Another concern is that computer fraud will occur. The payroll system within a company contains all employee information, including social security numbers, that the employees may not ant others to access.

A set of controls has to be created and monitored to protect all information in a company, especially payroll information. Cost- Benefit Analysis of Outsourcing Payroll In general, payroll is considered to be a pain by most professionals. Because of this, payroll services offer a great alternative to in-house processing. If chosen correctly, payroll providers can provide a less expensive and simpler means of paying employees, filing taxes, and providing other services as requested. Some companies, however, are skeptical of outsourcing payroll for a number of reasons.

These include that they consider in-house processing to be more cost effective. They are also “protective of wage information and want to maintain control over payroll data to handle last-minute changes” (Lee, n. D. ). In 2013, The National Small Business Association (NASA) surveyed 1 , 500 small business owners about how they handle payroll. Forty percent of them reported outsourcing, while sixty percent reported handling it internally instead. In that same survey, “one in three small businesses reported spending more than $500 per month (more than $6,000 per year) on outsourced payroll services” Cones, 2013).

Nearly one in four of those businesses handling payroll internally report spending more than six hours per month on payroll. This translates to 72 hours per year at about $36 per hour, according to the Bureau of Labor, which translates to $2,592 per year. So, the businesses doing payroll in-house are spending less in total on average each year than those that outsource it, but they are using their own man-hours to do it. This survey revealed that those who outsource believe it is worth paying someone else to do it.

However, considering that doing payroll in-house leaves increases the likelihood of internal mistakes, payroll sots can substantially increase if not done correctly and consistently (Jones, 2013). Payroll providers offer many different services based on customer preferences. They can do as little or as much depending on their customers’ needs. Some basic services provided by payroll providers include calculating payroll and tax obligations for each employee, printing and delivering checks, and providing management reports.

Additionally, payroll providers can offer “automatic check signatures, envelope stuffing, direct deposit of checks, and can even issue W-2 forms for an additional fee of about $1 per form” (Lee, n. D. Some providers are now offering tie-ins with 401 (k) and section 1 25 mutual fund plans, allowing employees to include automatic deductions from their paychecks. When choosing a provider, there are many things to keep in mind. The first and probably most important is that a payroll service should offer a high level of customer service, as reliable and consistent communication is essential.

References from current clients should be requested before committing to a provider to get a better sense of the provider’s customer service quality. A provider that is within reasonable driving distance is preferred, in case you deed to physically pick up checks in case of an emergency. Another thing to look out for is if the company is “bonded to ensure your company will not suffer from any potential financial mishandling’ (Lee, n. D. ). Another thing to consider when choosing a payroll provider is the price of services to be provided. Traditionally, there is a base account fee that depends on the pay period.

The more frequent payroll periods will cost more than less frequent payroll periods. This means that weekly pay periods will cost more than monthly pay periods. In addition to the base account fee, basic service costs will be between $0. 0 and $2. 00 per check. Additional costs for tax filing and direct deposit can cost between 54 and $9 per pay period. There can also be fees for “adding or dropping employees, adjusting employee information, or setting up your account” (Lee, n. D. ). These additional fees can vary dramatically across services, so it is important to consider these additional fees before signing with a provider.

There are many benefits of outsourcing payroll. These benefits include freeing up employee time spent processing payroll. Processing payroll manually can be time-consuming and outsourcing the payroll can free up the employee’s time to pursue more important revenue generating activities. The manpower that a company uses every week on payroll could be used more effectively in another area. Another benefit of outsourcing payroll could include reduced costs. While the majority of U. S. Businesses process payroll checks internally, this is not always cost-effective (Lee, n. D. ).

A company will at least need to have a computer or manual accounting program and training to use it. They will also have to keep up to date on changes in personnel, deadlines, and tax requirements. Payroll providers are often cheaper than the direct costs of recessing payroll in-house. Outsourcing payroll makes more sense if your payroll changes with each pay period. This could be affected by employees working varying amounts of hours each week or if the company has a high turnover rate. A payroll service could also prove to be very cost effective if the company is required to pay payroll taxes for multiple states.

However, if a company’s payroll expenses are consistently the same each pay period, it may be easier to handle the payroll internally rather than outsourcing (Lee, n. D. ). Another benefit of outsourcing is the ability to offer direct deposit. Direct deposit is often difficult to offer if a company does not outsource payroll (8 Benefits of Outsourcing Payroll, n. D. ). The demand for direct deposit among employees is growing as it saves them from having to make a trip to the bank. Direct deposit can also eliminate error-prone paper handling as well as the monthly reconciliation of individual payroll checks.

Another benefit of outsourcing payroll is avoiding IRS penalties. According to the IRS, 40 percent of small businesses pay an average penalty of $845 for late or incorrect filings and payments each year. The IRS also reported that en out of every three employers has been charged for a payroll mistake, with total penalties reaching into the billions of dollars (Lee, n. D. ). This can be avoided if outsourced because “most national payroll services provide a tax guarantee, ensuring that customers will incur no penalties because the providers take responsibility for penalties when they do cud’ (8 Benefits of Outsourcing Payroll, n. . ). Many payroll services offer the option of filing state and federal payroll taxes, typically at little or no cost. The payroll provider fall “impound the tax due at the time the paychecks are issued, earning interest n the funds until the money needs to be handed over to the government” (Lee, n. D. ). One additional thing to keep in mind about outsourcing payroll is that many providers will not calculate local or city payroll taxes. If this is a significant issue for a company, the company will need to be sure to consult the provider on this matter. Another great benefit of outsourcing payroll is avoiding technology headaches.

If payroll is outsourced, small business owners no longer need to question whether they have the latest version of payroll software with the most recent tax tables. They can use outside expertise so that they do not eave to deal with constantly changing regulations, withholding rates, and govern meet forms. Additionally, without proper knowledge Of payroll procedures and access to a sound payroll system, it is easy to make big mistakes. If payroll is not processed accurately and correctly each pay period, a company can incur many unneeded costs and penalties.

Aside from the benefits of outsourcing payroll, as with all things, there are some disadvantages to consider. Outsourcing payroll means losing that control over your employees’ and company’s personal and confidential information. Another factor to consider, as mentioned earlier, is cost. Payroll services usually cost more than doing it in-house. The cost of the payroll service will need to be compared to the time required to complete payroll in- house and if that in-house time could be used more efficiently in other areas of the company.

Another thing to consider is that the amount of time needed to fix a payroll error or update employee information will be more time consuming when using a payroll service versus doing it in-house (Platen, n. D. ). Internal Controls of Payroll Accounting Payroll is one of the most difficult and most important processes a business will perform. It is important to have proper procedures in place to protect the company’s assets by reducing the risk of fraud and eliminating errors (Binge, n. D. ). Internal controls are established as practices and guidelines a business follows to protect its resources.

If followed correctly, these internal controls can help to reduce the risk of theft of cash and other assets. Some general payroll controls include audit, change authorizations and change tracking log, error-checking reports, expense trend lines, issue payment report, and separation of duties. Companies should have either internal or external auditors conduct a periodic audit of the payroll function to make sure payments are being calculated correctly, employees being paid do indeed work for the company, and make sure time records are being accumulated properly.

Changes to employee information should only be allowed when the employee has submitted a written and signed request for the company to do so. The same applies for pay rate changes requested and signed by a manager. The change tracking log should be activated to make sure that access is only available through a password protected interface. Error- checking reports, expense trend lines, and issue payment reports can help to attach errors that may have slipped through the tracks. Error-checking reports and expense trend lines can show possible errors and fluctuations in payroll expenses.

Issue payment reports can be sent to individual departments for verification of employees hours worked as well as confirming the employees are still active (Payroll Internal Controls, n. D. ). One of the most common types of internal control for all accounting processes, including payroll, is segregation of duties. Every different task of payroll should be segregated by department or individual, if possible. A company should maintain a separate bank account for payroll as well. This will reduce the amount of company assets at risk and makes it easier to audit.

A member Of management should be designated to periodically review company bank records pertaining to payroll as well. However, not all companies have enough staff to separate each task of payroll. In this instance, the business owner or a trusted manager should oversee the payroll process from beginning to end. If this cannot be done due to time constraints, “regular yet random and thorough inspections should be conducted” (Binge, n. D. ). Without proper internal controls for the payroll process, a business runs the sis of compensation being issued to nonexistent or terminated employees.

A company can also lose assets through “overpayment to dishonest employees and incur excess expenses by having to redo payroll records” (Binge, n. D. ). When these internal controls are not followed, mistakes can occur, and payroll may be delayed. When payroll is delayed, a company will likely have to deal with disgruntled employees, which may lead to a decrease in morale which can negatively affect the entire company now and in the future. ASS and Planning for the Future of a Business The addition of ASS has helped all aspects of businesses since its introduction.