The Differences Between Accounting, Payroll, and Bookkeeping

August 25, 2023
Accounting blog: The Differences Between Accounting, Payroll, and Bookkeeping

What are the differences between payroll, bookkeeping, and accounting?

Many people often use the terms accounting, payroll, and bookkeeping interchangeably.

Yes, all three terms are related, but they are actually quite different from one another.

Knowing the difference between them can help you save a lot of time and money when searching for an individual or firm to handle your finances.

As an accounting firm, we hope to answer some questions that we are often asked by new clients.

What is payroll?

payroll and bookkeeping services

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The most basic meaning of payroll is a company’s list of employees, but is commonly used to refer to

  • the action of calculating and distributing paychecks to employees on payday
  • the financial records of employees such as salaries, wages. bonuses, withheld taxes, deductions etc.
  • the amount of money a company pays its employees
  • a company’s department that calculates employees paychecks

In order to run payroll, you need  specific information from your employees such as

  • a filled out W-4 Form
  • if they are hourly, you need to keep track of the hours they worked
  • time off
  • salary or wages
  • overtime pay
  • fringe benefits

There are multiple ways to run payroll. The three most common ways are use a payroll accounting, use a payroll software, or do payroll by hand.

Outsourcing payroll to a payroll accounting can free up your time, and the accountant does the entire payroll process for you.

Payroll software automates a large majority of your payroll program, and can calculate wages and taxes, and some even will turn in taxes for you.

Doing payroll by hand is the most time-consuming and requires someone learning how to do payroll, and that person is called a bookkeeper.

What is bookkeeping?

small business accounting

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Bookkeeping is the recording, storing, and retrieving of financial transactions for an individual, company, or nonprofit organization.

Bookkeeping can include common financial transactions

  • paying suppliers
  • billing for services provided or goods sold to clients
  • documenting receipts from customers
  • recording invoices
  • processing employees’ payroll
  • financial reporting
  • monitoring accounts receivable
  • recording depreciation
  • provide financial reports

In today’s world, bookkeeping is most commonly done using computer software, such as QuickBooks.

Bookkeeping software is extremely beneficial. It can process accounts faster, increase reporting accuracy, and your data is backed up.

It is typically performed by a bookkeeper, which is not the same as an accountant.

A bookkeeper records the day-to-day financial transactions of a business.

Bookkeepers handle the recording aspect of all accounting processes, accountants handle all parts of the accounting process.

So, what is accounting?

small business payroll service

source: Unsplash

Accounting is the action or process of keeping financial records, and then analyzing, verifying, and reporting the results.

A large aspect of accounting is presenting the information in the form of general-purpose financial statements, such as a balance sheet or income statement.

The reports are often presented to people outside the company and must be prepared in accordance to accepted accounting principles, also called US GAAP.

The portion of accounting is referred to as financial accounting.

Accounting is also the force behind a company’s success.

Without accurate financial reports, management would never know if the company if financially healthy or not.

This portion of accounting is for internal use only.

Internal analyses can include budgets, standards for controlling operations, cost of goods sold, quotes, etc. and is known as management accounting.

A third aspect of accounting involves income tax reporting, and must be done in compliance with government regulations.

The bottom line

Accounting, payroll, and bookkeeping are all part of the same financial circle, but they support businesses in different stages of the financial cycle.


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