What is payroll in accounting?

What is payroll in accounting
What is payroll in accounting?

Payroll accounting is the recording of all payroll transactions in your books. As a business owner, you use payroll journal entries to record payroll expenses in your books.

Payroll journal entries fall under the payroll account and are part of your general ledger. Record the following expenses in your payroll account:

  • Employee compensation: Salaries, wages, paid time off (PTO), bonuses, commissions, and other taxable income reported on Form W-2.
  • Payroll taxes: Federal income, Social Security, Medicare, and applicable state or local income taxes withheld from employee wages.
  • Employer taxes: Employer match of Social Security and Medicare taxes, as well as federal and state unemployment taxes
  • The employer portion of fringe benefits: Health insurance, life insurance, education assistance, etc.
  • Employee deductions for benefits: Health insurance, retirement plan, etc.
  • Other deductions: Child support, spousal support, outstanding tax liabilities, etc.

Payroll accounting helps you keep track of employee compensation and other payroll costs. Accounting for payroll gives you an accurate snapshot of your expenses.

Also, Read:-Different types of Bed Debts in Tally Accounting

Payroll Accounting

Every organization keeps a record of all its financial transactions. Salary paid is one of the significant operating costs which has to be reported in the books of accounts. As part of payroll management, it is essential to check that all salary and reimbursement data is fed accurately into the accounting/ERP system.


You can pay your salary by cash, cheque or bank transfer. Typically organizations provide employees with salary bank accounts. Once you complete payroll, you need to ensure that company’s bank account has sufficient funds to make the salary payment. Then you need to send a salary bank advice statement to the concerned branch. This statement is issued with particulars like employee id, bank account number, amount of wages, etc. If you are opting for payroll software that has an employee self-service portal, you can easily publish the payslips and employees can log-in to their account and access the payslips.


Once you complete the payroll run for a particular month, the finance and high management team may ask for reports such as department-wise employee cost, location-wise employee cost, etc. As a payroll officer, it becomes your responsibility to dig into the data and extract the required information and share the reports.

Set up a Payroll System

A payroll system is any kind of system that helps you calculate and manage your employees’ paychecks. Generally, you have three options:

  • Manual: Some small businesses choose to do payroll by hand, mostly because of the cost savings. However, manual payroll is the most tedious and time-consuming, as well as the most prone to errors.
  • Outsourced: If you have the cash to spare, you can hire someone else to do your payroll for you. They will usually handle everything, from processing paychecks to handling tax deposits, payroll taxes, employment taxes, etc.
  • Software: Payroll software combines the best of both worlds—the cost-effectiveness and control of manual with the time-savings, accuracy, and convenience of outsourcing. Plus, most software today has comprehensive features, offering everything from storing information to calculating payroll tax and beyond. For example, Gusto is a FreshBooks integration that imports your payroll transactions automatically. It can help you make more accurate records without compromising speed.
Steps to Set Payroll Process

Like established businesses, startups have to be as diligent and considerate throughout payroll processing. Often, it just takes one mistake to wreak havoc in entire payroll management. In order to get a handle on your payroll process, bring your HR, accountants, and tax experts on the same page.

As a startup, if you don’t have access to all the relevant specialized individuals, you should exercise even more caution and take your time to process payroll tasks. Founders often find out later that setting and managing payroll is not as easy as they thought it would be at the start.

If you have a finance background, it will help you get familiar with various concepts of the payroll process and management. Here’s a simplified version of you can set up your payroll process:

Be the first to comment

Leave a Reply

Your email address will not be published.