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Payroll Accounting: Part 3 – Comparing Payroll Methods for Accounting

5 mins read

This article explains the differences between the 3 different methods of payroll processing for the payroll journal entries entered in an accounting software.

Accounting and payroll are both very important aspects of a business’s financials. Accounting and payroll cross paths within a business, as the payroll that is processed needs to be recorded within the accounting software the business uses. Depending on how the payroll is processed, it can offer different options for how journal entries are recorded on the accounting side of the company’s financials. In this article we will explain the 3 methods of payroll processing briefly, then compare the differences they create for entering journal entries in accounting software.

For more information on what payroll journal entries are, as well as recording them in accounting software, check out Parts 1 and 2 of this series!

3 Methods of Payroll Processing:

1. Manual
Manually processing payroll involves using the CRA’s Payroll Deductions Online Calculator. This is an online tool the CRA has provided at no charge that businesses can use to calculate the source deductions that must be withheld from employees’ paycheques. These source deductions include income tax (both provincial and federal), Canada Pension Plan (CPP), and Employment Insurance (EI). These source deductions, which are considered a liability in accounting terms, will be held by the company and then must be paid (remitted) regularly to the CRA depending on the business’ remittance frequency. While this can be a good method to use for small businesses, this method is considered highly ineffective and inefficient for medium to large businesses due to the amount of effort and detail that goes into processing each employee’s payroll.

2. Accounting Software

This method of payroll processing involves using specialized accounting software such as QuickBooks or Sage50. This is a digital form of payroll processing that handles numeric inputs and outputs to calculate the correct owed compensations and deductions rather than having to calculate them manually. There is a cost associated with this software, however there are benefits that come with that cost. With the automations and recurring options available, software simplifies the tracking, maintaining, and delivering of employee compensation. Software is also more dependable, secure, and accurate without the risk of human error.

3. 3rd Party

Using a 3rd party company to process the company’s payroll information involves outsourcing payroll to a professional. This method takes the burden off the shoulders of the company and puts payroll into trusted, knowledgeable, and experienced hands. This is a paid method of accounting and can usually be set up as a fixed rate for the service, however there is also the consideration that an employee will not be paid to process payroll within the company which may be costing the company more.

Comparing the Similarities and Differences for Accounting Entries:

Payroll Processing and Accounting

As explained above, there are differences as well as similarities that can be experienced when recording journal entries for payroll accounting depending on the payroll processing method used. The 3 main methods of payroll processing include manual processing, using software, or going through a 3rd party company. When it comes down to it, each business must choose which payroll method is best for them, however, it may be beneficial to take into account the accounting process that would follow.

As we only briefly explained the payroll processing methods in this article, stay tuned for our series on the 3 different methods we touched on.

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