You Need to Understand Differences Between Accounting and Payroll

As a business owner, you need to understand the differences between accounting and payroll. While accounting and payroll overlap, the two departments differ substantially. Accounting keeps track of their business’s financial health. Payroll focuses on paying employees, taxes, and benefits. In this article, we discuss the similarities and differences between accounting and payroll.

Understand the Purpose of Accounting

Accounting keeps track of all the revenue and expenditures a business sees. Yes, sometimes an expenditure can be payroll, so in this instance, there is overlap. Payroll, on the other hand, only refers to the process of paying employees.

Rather than speaking in abstract terms, we should speak about concrete examples. Say, for instance, your business needs to replace the roof on your primary office. Replacing a roof costs a lot, and your accountant or accounting department should record how much the work cost. These costs have nothing do with your payroll, though. With the exception of a situation where you own a roofing company and are paying your own employees to do the work, it’s probably necessary to hire a roofing company and pay them. Your accountant will keep track of these expenses, and use them to offset your tax liabilities come tax season.

The same situation applies when it comes to buying supplies, materials, tools, or any other products necessary to operate your business. Yes, these things cost money. Yes, keeping track of purchases, and their reason matters. But no, it’s not the same as cutting checks for employees that routinely and regularly come to work for your business. These are simply expenditures, or as people often call it, “the cost of doing business.”

What to Expect From a Good Accountant

Accounting is the all-seeing eye that looks down on all financial aspects of your business. This includes but is not limited to payroll. Businesses with a good accounting can understand where every single dollar came from for the entirety of their existence. Obviously, people make mistakes, forget to submit documents, or misplace a decimal point. Fortunately, a good accountant will notice these errors and rectify them before bigger problems develop later.

In many instances, accountants can offer advice on which assets to obtain and which to get rid of. Since inflation became a concern for many business owners, worried about the depreciation of their assets or the state of their business relationships, accountants might also serve as advisors as well.

Are Vendors or Suppliers Part of Payroll?

No! Business owners pay vendors or suppliers to provide them with the materials needed to run their business, but these suppliers are not on the payroll. Yes, a good accountant keeps track of every single dollar spent on supplies, materials, or services, but only to create an accurate assessment of the profit/loss a business might have. This is where it is particularly important to understand the differences between accounting and payroll

What is Payroll and Why is it Different than Accounting?

Payroll is a catch-all term for the process of paying employees, taxes, and benefits. It’s a thing, it’s a process, it’s a system, and it’s a crucial part of most businesses. This doesn’t pertain to sole proprietorships, partnerships, many LLCs, or S-corps where owners distribute profits as they see fit.

Because this article focuses more on the functions of accounting, conversely, I should cover what payroll is not. If you’re interested in learning more about what payroll is, we have an article that goes over the broadest aspects of payroll. I suggest checking it out.

Payroll makes sure that employees and the government get their proper share of profits a business earns. Payroll will not in any way help a business owner understand the overall health of their business. Think of payroll as checklist making sure to pay all the bills. This does nothing to highlight the profitability of particular services, the costs of certain departments or employees, and can’t act as a roadmap to growth

Knowledge is Power

Business owners that understand the differences between accounting and payroll allows them to get more from each aspect of their business. In the same way than an expert worker knows exactly how each tool can be used, business owners should know the possibilities and limitations of the different departments of their business.