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Payroll terminology

The context of the payroll function

Watch the video to hear the Kaplan tutor set the context of the payroll function, before we look at the key terms we need to be familiar with and the process we follow.

Gross pay

The initial calculation to be carried out for each employee is the calculation of the employee’s gross pay. Gross pay is the wage or salary due to the employee for the amount of work performed in the period. This will be done weekly or monthly depending upon how frequently the employees are paid.

Gross pay may depend upon a number of factors, including:

  • basic hours worked
  • overtime hours worked
  • bonus
  • commission
  • holiday pay
  • sick pay.

Wages and salaries

These are fairly straightforward. Employees will have an agreed monthly, weekly or hourly rate. The monthly and weekly rates will not need any further calculations.

However, total earnings will need to be calculated for hourly-paid employees. The source of this information might be clock cards. A clock card is a card which records the hours worked by an employee.

As the employee arrives or leaves they put their card in the slot of a special clock. The mechanism inside the clock stamps the time on the card. The payroll clerk would transfer the number of hours worked onto special calculation sheets.

Overtime and shift payments

These need to be identified so that the payroll clerk can calculate the amount payable.

Overtime refers to any hours worked in excess of the agreed number of weekly or monthly hours for that employee. For example, it may be agreed that an employee has a standard working week of 38 hours. If they work for 42 hours in a week then they have worked 4 hours of overtime.

  • Some employees are paid at a higher rate for overtime. They might be paid at one and a half times the normal rate, which would be called time and a half.
  • Twice the normal rate is called double time. Some employees might be paid premium rates or bonuses for working certain shifts.

Bonus and commission payments

The business may pay certain employees a bonus. This bonus may be for achieving a particular target, either for individuals or for teams. For instance, a sales representative might be paid a basic salary of £10,000 a year plus a 1% commission on the value of sales that they make.

Holiday pay

Most employers pay their employees even while they are on holiday. If the employee is paid monthly, then there is no problem. The employee is paid the usual amount at the normal time.

If the employee is paid weekly, they would prefer to be paid for the holiday period in advance. This means that if the employee is taking two weeks’ holiday they will have to be paid three weeks’ wages at once.

Statutory sick pay (SSP) and statutory maternity pay (SMP)

These are payments made to an employee who is unable to be at work, either due to illness or they are on maternity or paternity leave. There are some legal guidelines which apply to SSP and SMP, but there are variations to these rules. Businesses will choose whether they pay the minimum legal requirements or whether they wish to be more generous. We will not go into the detail of these rules here in this course.

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Other Accounting Functions: Payroll and Banking

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