Why use clearing accounts in your accounting system for Paypal, Credit Cards, Amex, etc.?

In our highly connected, networked, real time information world, you'd think when you make a payment on a credit card, the amount is immediately transferred to the merchant (the business you're buying from).It is one of the banking systems little secrets that this isn't the case, and it's going to take a major change in the technology that underpins our financial system to change that. Banks & other financial institutions will tell you they're cutting edge from a technology standpoint - the real truth is they're not, 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 block chain & smart contracts will eventually fix this, a discussion for another day.

For now, if you're an e-commerce merchant and you use a payment gateway to collect money from customers (whether that be a credit card, Amex or other payment forms), there is a delay in the funds coming into your bank account, normally 1-3 days.

So your workflows may look like without a clearing account:

  1. a customer checks out of your shopping cart
  2. you raise an "invoice" or "sales receipt" that increases your revenue and your accounts receivable in your accounting system
  3. you then pay the invoice in your accounting system against your bank account =:> this is where the problems start unless you're using Paypal

(For Paypal, this is how you do it:

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

What will happen is your 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 month end 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

  • a customer checks out of your shopping cart
  • you raise an "invoice" or "sales receipt" that increases your revenue and your accounts receivable in your accounting system
  • you then pay the invoice in your accounting system against your credit card clearing account
  • you then 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 and you should be able to see it):

  • amounts 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 now charge the merchant fee separately, rather than offsetting it against your receipts. If you have differences it could be your merchant facility is doing an offset still.
  • chargebacks from customers. These can be very hidden, the amounts can creep up on you if you're not on top of it. The clearing account reconciliation at least makes sure you're aware of them.

Is any of this ideal? I'm afraid not, there is substantial manual work in reconciling the amounts you get as receipts on your bank statement vs your sales from your shopping cart, with the different date just compounding 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 to 2-3 days sales, it's worth digging into to see if you have leakage in your business due to the funky way the global banking systems work!

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4 important things for online retailers to consider when collecting sales tax

If you are an e-commerce merchant in the USA, then it’s likely you need to deal with US sales taxes. This is a highly complex area due to the number of jurisdictions involved, all of which have different rules.

45 of the 50 states charge sales tax, up until recently this was on products only. Some states have started adding in services as the size of the service sector grows, again this differs by state.

(This is different from something other countries have called a Value Added Tax (VAT) or Goods & Services Tax (GST) which is charged on both products & services, is normally a flat rate, it’s not variable by product, and it’s charged regardless of whether you’re selling to a wholesaler or to an end user.)

As a business owner, collecting tax on behalf of the government (any government) is a fact of business life. As an e-commerce merchant, you want to automate as much as possible within your sales systems. However, given the complexity of the rules, how do you make sure you’re not paying too much?

To start with, these four questions are the main ones you need to be able to answer, in this order.

    • A. What state are you in

 

    • B. What states do you sell to other than your home state

 

    • C. Do you sell a product or a service (or a mixture of both)

 

    • D. Are you selling to a wholesaler or end user

 

We’ll use an example here, where you’re a seller of designer flip flops in California, in an area with a sales tax rate of 7.5%.

A. What state are you in? 

In California, the sales tax rate is 7.5% (including 1.25% for mandatory local taxes). If you’re in Union City (part of Alameda County) this goes up to 10% with the local tax rate.

By way of comparison, Oregon is one of the 5 states, for example, with no sales tax. Alaska has no state sales tax however allows local counties to levy sales tax.

So any products sold and shipped from a business based in California will attract a 7.5% rate.

B. What states do you sell to other than your home state

To protect small businesses from the complexity of multi-state taxation, the federal government provides limitations on how states can tax the sale of goods across state lines. The Supreme Court has established that states cannot require out-of-state sellers to collect taxes from their customers unless they have a nexus within that state.

Literally translated as a “connection,” a nexus means that your business meets one or more of the following criteria:

  • Your business has a physical location in that state
  • Some of your employees reside and work in that state
  • Your business has property (this includes intangible property, like trademarks, copyrights and patents) in that state
  • Your employees regularly seek or perform business in that state (for example, if you have an active salesperson in that state)

This means that most online sellers can ship goods out of state without having to charge or collect sales tax. Keep in mind, however, that if you have some sort of physical presence in a state, you may be responsible for collecting sales tax from customers from there.

In our example, you have an office in California but not anywhere else. However, let’s say Macy’s decided they wanted to stock your product and you need to hire an account manager in Ohio to manage that relationship.

On this question, the answer is probably yes you do need to include sales tax for Ohio. However, this would be overridden by the 4th question, in that Macy’s would be a wholesaler in this case.

A better example would be if you decided to open a physical store in New York. At that point you’d need to consider sales tax for New York State (& local).

C. Do you sell a product or service (or mixture of both)

For our example, you sell designer flip-flops. That’s pretty clearly a product.

However, there are many examples where the lines are blurred. For an equipment installation, if the customer is buying the equipment and the installation is part of the purchase, the service in some cases is subject to sales tax. However, if you need to get your air conditioner repaired, and that means replacing a couple of small components, then the product is incidental to the service being purchased and hence it’s the service that’s assessed.

This is a good one to get advice on. These categories are never clear cut, a good accountant who knows your industry will be able to give you industry guidance here which is always your best bet.

D. Are you selling to a wholesaler or end user

Let’s say you get a contract where your flip-flops will become part of a set “outfit” (they’ve been noticed by a celebrity in Hollywood). If the company you’ve contracted with will then onsell your product as part of a total outfit, then in that case you wouldn’t charge sales tax, as they will do so in full once they sell the full outfit to the end purchaser.

As you can see, this is a highly complex issue. What’s the best thing to do?

  • Make sure you know the answer to these 4 questions and get advice from your accountant if you need to pay sales tax, and how much.
  • Setup your inventory items in your shopping cart system with enough detail so the automatic calculations can work effectively, based on both the product code, the bill-to address of your customer & your customer type (wholesale vs end user). If your accountant can’t help you with the right systems choices, it might be time to find a new accountant…….
  • Your shopping cart may round up on every order, which will protect you on audits however may mean you’re paying too much, especially if you have a large number of smaller sales. OneSaas will take your sales from your shopping cart and fix this in your accounting system so you’re not paying too much due to “rounding up”.

About the Author


Connect with Rachel on LinkedIn
More information about CFO for Rent