Reconciling Deposits

Customer deposits arrive in company bank accounts via many different payment methods. In this article I will explain different types of deposits, grouped by the recommended approach for processing or reconciling their receipts (or ‘payments’, as you might be used to calling them).

Electronic Funds Transfer

In Australia, EFT is the most common customer payment method for the majority of businesses. Hopefully your customer is sending you a remittance advice explaining which invoices they are paying, or including a bank statement reference clearly identifying the invoice number(s) they’re paying. The absence of this information can make reconciling this type of transaction a little bit trickier, especially if there are multiple open sales invoices that the receipt could potentially belong to. This issue aside, this is typically the easiest type of deposit to reconcile. It’s a case of clicking on the Match tab in the Xero bank reconciliation screen and navigating to the relevant sales invoice based on a customer name, amount or invoice reference number (if Xero hasn’t already made a suggestion for you).

PayPal

With the introduction of Xero’s integration with PayPal, this payment method has become easier to reconcile.[1] This integration forms two functions. First, it allows your customers to click on a link in your online invoice when they receive it via email, which allows them to pay via PayPal with a minimal number of clicks. Second, your sales invoices in Xero will show a receipt applied to them as soon as your customer has paid via PayPal. In addition, the Xero/PayPal integration will enter a Spend Money transaction for the fees associated with this receipt at the same time.

So, how do you set this up? It’s really simple.

  1. Settings > General Settings > Invoice Settings
  2. Click on Payment Services
  3. Click Add Payment Service
  4. Make sure that you select the relevant PayPal bank account in Xero from the Payment Account drop-down menu. If you want to offer this for your invoices in different currencies, you’ll need to set up a payment service for each PayPal currency.
  5. Link the relevant Fees Account from the last drop-down list. This could be a bank fees account or a special account you’ve set up to specifically track your PayPal fees.

When it’s time to reconcile your PayPal bank feed, you’ll see lots of green auto suggestions down the right side of your screen. If you’ve received multiple deposits on the same day for the same amount, double-check that they’re matched correctly before clicking OK.

Credit Card, Direct Debit, Stripe, eWay, Cash & Cheques

I’ve grouped these payment types together because they have the following in common:

  • Their settlement (or deposit) date typically differs from the date that the customer actually made the payment.
  • The bank deposit often refers to receipts from multiple customers and multiple invoices all at the same time. It can mean that one bank deposit potentially refers to hundreds of different sales invoices!

A best practice bookkeeping principle is to separate these into different accounts for each type. It makes it easier to figure out why something won’t reconcile. It also means that your bank accounts will more accurately reflect their correct balance. Undeposited funds will show in separate accounts with their respective balances.

To set this up, go to:

  1. Settings > General Settings > Chart of Accounts
  2. Click Add Account
  3. From the Account Type drop-down list select Current Asset
  4. Give your account a number and a name such as Clearing Account – Direct Debit
  5. From the Tax drop-down list select BAS Excluded
  6. Also, tick Enable payments to this account
  7. I would also recommend ticking Show on Dashboard Watchlist
  8. Repeat this process for each receipt type.

When a sales invoice is paid by a customer, navigate to it in Xero and then, at the bottom in the Receive a payment section, enter the relevant payment details. From the Paid To drop-down list, make sure that you select the relevant, newly created clearing account.

Next up you need to account for the transaction fees. Merchant fees are typically charged to your bank account on a separate bank feed line, so you don’t need to treat these any differently. For direct debit, where the service provider withholds a fee from the deposit, fees need to be entered so that your deposit balances to your clearing account. When entering your receipts for a given day, look up the fees on the direct debit provider’s website and enter a Bill transaction for these. Apply a payment at the bottom, choosing the relevant clearing account from the Paid To drop-down list.

On the day that you that you reconcile the bank deposit, check your clearing account. To do this, go to:

  1. Reports > All Reports > Account Transactions
  2. I recommend clicking the star next to this report so that it shows as a favourite, creating a shortcut on your Reports menu
  3. Choose the clearing account and the relevant date range and check that your closing balance at the bottom is zero. If not, narrow the date range until you find the day that it went out of balance. This will help you pinpoint exactly where things went wrong, and you won’t be looking for a needle in a haystack.

[1] However, this method is not to be confused with PayPal bank feeds. These already need to be in place, one for each currency that you deal with. This can mean that you have quite a few bank accounts on your dashboard, as these PayPal accounts will be in addition to your regular bank accounts.

 

This article was originally published in Xero User Magazine, Issue 10.

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