Why use clearing accounts in your accounting system for PayPal, credit cards, and other payment channels?

Learn why you need to use clearing accounts in your accounting systems.

In our highly connected, networked, and real-time information world, you’d think when you make a payment on a credit card, the amount is immediately transferred to the merchant.  This isn’t the case, and it’s going to take a major change in technology to change that. Banks and other financial institutions will tell you their technology is cutting edge. The real truth is they aren’t, with a few exceptions.

The underlying problem is that it takes 2-3 days for funds to clear through the various banking systems around the world. The more parties there are in between, the longer it takes. Technologies like blockchain and smart contracts will eventually fix this, but that’s another story.

For now, if you’re an e-commerce merchant and you use a payment gateway to collect money from customers, whether it’s a credit card, Amex, or other payment forms, there’s a delay of 1-3 days in the funds coming into your bank account. 

Your workflows may look like they’re without a clearing account.

1. A customer checks out of your shopping cart.
2. You raise an invoice or a sales receipt that increases your revenue and the accounts receivable in your accounting system.
3. You pay the invoice in your accounting system against your bank account. This is where the challenge begins (unless you’re using PayPal - see below).

For Paypal, this is how you do it:

1. A customer checks out of your shopping cart.
2. You raise an invoice or a sales receipt that increases your revenue and the accounts receivable in your accounting system.
3. You pay the invoice in your accounting system against the PayPal bank account you set up. This should auto-match against the bank feeds coming from your PayPal account. Work with your bookkeeper so that your workflows facilitate this.

The receipts from customers in your accounting system won’t match the bank feeds. If you collect money on November 30th, it may not be in your bank account until December 2nd. You’ve crossed the month as well which compounds the problem. Accountants and bookkeepers get most upset by an accounting system where the cash value on your balance sheet doesn’t equal the bank statement. The bank feed technology in most cloud accounting systems was meant to address this. However, the credit card clearing issue is still a gap.

Hence, there’s a step in between, which involves the use of the clearing accounts.

1. A customer checks out of your shopping cart.
2. You raise an invoice or a sales receipt that increases your revenue and the accounts receivable in your accounting system.
3. You pay the invoice in your accounting system against your credit card clearing account.
4. You mark receipts that come in from your bank feed against that clearing account - money in, money out.

The balance of the clearing account at the end of the month would be made up of two amounts. Run a balance sheet to see it.

Amounts are shown as paid in your shopping cart which haven’t been received yet into your bank account. As a check, this is normally 2-3 days trading. Most merchants charge the merchant fee separately, rather than offset it against your receipts. If you have differences, it could be that your merchant facility is still doing an offset. Chargebacks from customers can be very hidden. The amounts can creep up on you if you aren’t on top of it. The clearing account reconciliation makes sure you’re aware of them.

This isn’t ideal, though. There’s substantial manual work in reconciling the amounts you get as receipts on your bank statement vs. sales from your shopping cart. And the different dates also compound the problem of matching these off.

Use a clearing account. At the end of the month, take a look at the balance. If it’s substantially different from 2-3 days sales, it’s worth looking into to check for leakage in your business.