- Recording and tracking of merchant fees is essential for computing gross income.
- Merchant fees can be managed as a cost of sales or as an expense.
- Accurate reporting of merchant charges can help support decisions about choosing the right merchant accounts and sales channels.
- This article is for small business owners and bookkeepers who want to make the most of what QuickBooks has to offer.
If you accept payment from customers through a credit card payment processor, you will be required to pay a merchant (or transaction) fee based on the value or volume of the transaction. These charges can make up a substantial portion of your business's cost of goods sold, making them necessary to record and keep track of to calculate tax deductions and gross margin. QuickBooks provides a straightforward solution for dealing with merchant fees and maintaining consistent records. In this guide, we will see how to use these features effectively on QuickBooks Online and Pro.
accounting for merchant fees
Merchant fees, also called seller or transaction fees, are charged by merchant service providers to allow you to make sales on their platforms. Payment of fees for hosting, advertising, shipping, maintenance, setup and anything involved in the sales process. When you make a sale, the merchant account credits your sales proceeds to your bank account, deducting the fee from the merchant's total sales.
Tip: Looking for Payment Processor? Compare merchant fees in our Square review and Payment Depot review.
For example, if you sell $100 worth of products on Amazon and it charges a $20 merchant fee, you'll see that only $80 is deposited into your bank account. You should record merchant charges and gross sales in your bookkeeping software for accurate reporting. Another reason to keep track of merchant fees is that they are tax deductible.
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There are two ways you can apply for merchant fee or credit card processing fee.
cost of sales method
Accounting for merchant fees as cost of sales would place them at the top of the income statement. This means that the fee is deducted to get the gross margin. This is the formula:
Income – Cost of Goods Sold – Merchant Fee = Gross Profit
Since you don't incur these fees when sales don't happen, it's a good idea to treat them as cost of sales and include them in your gross margin. This is a fairly simple method that explicitly adds merchant fees to the cost of doing business, allowing you to compare service providers.
With the expense method, merchant fees are grouped under operating expenses such as rent, electricity and communications. With this method, however, you may lose sight of these costs among all the data in the income statement.
How to Manage Merchant Fees with QuickBooks Online
Each merchant service company or payment processor has different rates and terms. For example, PayPal charges 2.9% plus 30 cents for each transaction, while Payoneer transactions are free when made by another Payoneer user.
Important achievements: You may be unaware of how much you are being charged for the transaction, as each payment processor has different rates and terms. This is why you need a consistent system to handle merchant fees.
Using a hypothetical 2.9% PayPal processing fee as an example, here's how you handle merchant fees using QuickBooks Online.
1. Generate sales receipts.
under New, Choose Sales receipt or cash memo. Then, Create a receipt for your customer.
As you can see in this screenshot, we've created a $50 sales receipt for a PayPal customer. Under the Deposit to option, make sure to select Undeposited funds, which is an account that we will use to hold funds temporarily.
2. Match the sales receipt with the deposit.
The next step is to match the sales receipt with the bank deposit. You can click on New again, but this time under the other column select Bank Deposit.
You can select the account where the deposit will be made and then check the corresponding payment, which in our case is $50 from a PayPal customer, as shown below.
As far as QuickBooks is concerned, it still accepts $50 deposits. After this, under Add money to this deposit, Add a New Line with PayPal Customer receive from.
The amount will include the total transaction fee, which is 2.9% plus 30 cents, or $1.75, which has to be entered as -$1.75 and can be added to an expense account such as Merchant Account Fees.
The total for this deposit should now reflect the correct amount, which is $48.25 and matches the amount received.
Tip: Check that the total deposit amount matches the bank deposit feed. You should see a green match when you return to the Bank Feed page.
How to Manage Merchant Fees with QuickBooks Pro
Recording merchant fees in QuickBooks is essential if you're working with a payment processor, and QuickBooks Pro, the desktop version, makes the process just as simple as QuickBooks Online.
You can enter this information into the software in two ways, depending on whether the payment processor charges per transaction or a flat fee.
did you know? Payment processors may charge per transaction or a flat fee.
Entering Merchant Fee Per Transaction
Processors such as Square and PayPal charge a percentage of the transaction amount as a merchant fee.
For example, PayPal charges 2.9% plus 30 cents for each transaction. However, entering this information into QuickBooks Pro is fairly easy. Before doing so, you must have a dedicated account for merchant fees.
Start by navigating to the Receive Payment option on the Home screen or under Customers, and then follow these steps:
1. Select the customer.
Using the dropdown menu, select the customer for whom you are entering payment.
QuickBooks automatically retrieves information on outstanding invoices related to the customer and autofills the details.
2. Enter the payment amount.
In addition to the Payment Amount field, enter the exact amount to be paid by the customer.
3. Select the payment option.
Specify how the customer pays you. You will see some options on the screen. Clicking on More will bring up other payment methods like Stripe and PayPal.
If you are recording merchant charges for the first time in the software, you can click Add New to specify the processor being used for the business.
4. Correct the date.
Make sure you have selected the correct date using the dropdown calendar.
5. Enter additional details.
Now you can add other details as per your choice, such as reference number, memorandum, principal amount and amount due.
6. Record submission.
Go back to home screen. There, you will get a red color notification on the icon for record submission. Click it.
7. Select Transactions.
You will see a list of payments with options to filter and sort them. Check the payment you recorded, and then click OK to proceed.
8. Select Merchant Fee Account.
Under the payment you just entered, there should be a list of accounts. Select the appropriate expense account to record all merchant fees.
9. Enter Merchant Fee.
Use a negative number when entering merchant charges. The software will automatically deduct this fee from the total payment.
10. Record the entry.
Verify that the screen shows the correct information with the exact total in the bottom right corner. Next, click save close. Repeat the steps for all merchant charges.
Entering Merchant Fees as an Amount
Although not common, some payment processors, such as Fattmerchant, charge merchant fees on a monthly basis. If you work with such processors, you can navigate check register Go to home screen or use register, under banking, And select the account from which you want to pay the merchant fee.
1. Edit the date.
Make sure the date is correct. Use a calendar if necessary.
2. Select the seller.
in the dropdown list below recipient, Select the seller to whom you are paying the merchant fee.
3. Select Account.
Under Cause Select the Merchant Fees tab in the Account for Entry.
4. Add a memo.
You can add a memo to the payment if you wish.
5. Enter the merchant fee.
Enter merchant fee amount where you see payment. Finally, click Record To enter merchant charges.
Flexibility to Handle Merchant Fees with QuickBooks
QuickBooks lets you handle merchant fees in a number of ways so you can stay on top of your reports and taxes. As minor as merchant fees may seem, they can be a large part of your cost of goods sold, so keeping a careful record of them is essential.
As always, QuickBooks provides a powerful set of features to help you achieve your accounting goals seamlessly. This simple solution to what was once a complicated process for bookkeepers and business owners is proof of that.
FYI: Even if you're using one of the many QuickBooks alternatives, the general process is the same.
We hope this guide helps you understand how you can effectively manage credit card charges and merchant charges in QuickBooks Pro and Online.