Business and Personal Finance © 2007

Chapter 21: Managing Payroll and Inventory

Chapter Summaries

• The six steps in managing a payroll system are: (1) calculate gross earnings; (2) calculate payroll deductions; (3) prepare payroll records; (4) prepare paychecks; (5) record payroll information in accounting records; and (6) report payroll information to the government.
• Employees are paid by fixed salary, hourly wages, and commissions based on the value of goods they sell.
• Some payroll deductions are required by law, such as income and Social Security tax. Others, such as 401(k), are voluntary.
• Payroll information is recorded in the salaries expense account. Deductions become liabilities and are recorded in separate accounts as payables.
• To establish an inventory control system, know the amount of merchandise sold, what items are selling, and what items are not.
• Perpetual inventory systems are possible with bar code scanning and point-of-sale terminals. To keep a periodic inventory system up-to-date, regular physical counts are required.
• The specific identification method works for businesses that sell few, high-priced items. For first in, first out (FIFO) costing, the first items sold are the first bought. For last in, first out (LIFO) costing, the first items sold are the last bought.
• Inventory turnover is calculated by dividing the cost of merchandise sold in a time period by the average inventory.