The Missing Money Mystery
Imagine reviewing your business records at the end of the month.
Your point-of-sale system reports $20,000 in customer payments, but your bank account shows only $18,400 in deposits.
Where did the other $1,600 go?
For many small businesses, the difference is not missing money. It is the result of payment processing fees, refunds, chargebacks, settlement timing, and other adjustments.
Understanding these differences is essential to maintaining accurate financial records.
Gross Sales Are Not the Same as Bank Deposits
When customers pay with credit or debit cards, payment processors generally collect the payments before transferring funds into your business bank account.
The amount deposited may be reduced by processing fees, refunds, and other deductions.
Consider this simplified example:
| Transaction | Amount |
|---|---|
| Customer payments processed | $20,000 |
| Customer refunds | ($800) |
| Processing fees | ($400) |
| Chargebacks | ($400) |
| Net bank deposits | $18,400 |
Although $18,400 reached the bank, that amount alone does not explain the business’s sales activity.
The $20,000 in customer payments and the various adjustments need to be accounted for appropriately.
For example, refundable sales, processing expenses, and chargebacks may require different accounting treatments. Sales taxes collected on behalf of a taxing authority also need to be distinguished from business revenue.
Why This Matters at Tax Time
The IRS explains that Form 1099-K generally reports gross payment transactions without reducing the reported amount for processing fees, refunds, and similar adjustments.
Consequently, a business’s Form 1099-K may not match its bank deposits.
The IRS recommends reviewing merchant statements and other supporting records to determine the correct income and expenses to report.
Simply treating every bank deposit as sales revenue can produce inaccurate financial statements.
A Better Monthly Reconciliation Process
A reliable reconciliation starts with three sources: the payment processor’s transaction report, its payout or settlement report, and the business bank statement.
First, identify the gross customer payments processed during the period.
Next, identify refunds, processing fees, chargebacks, and other adjustments. Confirm whether sales taxes and tips are included in the reported amounts.
Then compare the resulting settlements with deposits appearing on the bank statement.
Timing differences deserve particular attention. Transactions processed at the end of one month may not reach the bank until the following month.
Finally, investigate unexplained differences rather than automatically creating adjusting entries to force the numbers to agree.
The Business Benefit
Accurate payment reconciliation helps business owners understand what they actually earned, what they paid in processing expenses, and whether their financial records are complete.
It also makes year-end reporting more manageable.
The IRS emphasizes maintaining supporting documents for business receipts and regularly reconciling bank records.
The takeaway: A bank deposit tells you how much money arrived. A properly reconciled payment report helps explain where that money came from and what happened along the way.
Supporting References
Need help putting these ideas into practice?
3A IT Consulting and 3A Bookkeeping Services provide practical support for business, financial and technology challenges.