Step-by-Step Guide to Reconciling Shopify Payments
One of the biggest challenges in working with Shopify is getting a real understanding of your costs of doing business on that platform. Many business owners simply book the deposits to Sales in their accounting system. Those who know that is wrong, or realize they need more information to manage their business, attempt to reconcile this manually and give up because they don’t understand “how” to record the entry accurately.
This article is designed to help business owners fully understand how to reconcile Shopify payments, so their Income Statement will provide an accurate picture of where their money is going and the actual costs of doing business on that platform.
Understanding Shopify Payments
Receipt of cash for Shopify sales may come from Shopify Payments, PayPal, or Amazon Payments. These payments are “net,” which means your revenue is higher than what you’ll receive as a deposit. Any or all of the following have reduced your revenue:
Rebates
Refunds
Shopify Payments fees
PayPal fees
Amazon Payment fees
To properly account for the items reducing your payments, you need to “gross up” the transaction. This means you are taking a smaller number (the deposit) and increasing it to reflect your actual sales revenue and then adding the expenses being deducted on the other side of the accounting entry.
The following section walks you through exactly how to gross up the entry when reconciling the deposit coming through in your bank feed.
How to Reconcile a Shopify Payment, Amazon Payment and PayPal Payment
Shopify Payments
1) Settlement Deposit Received
Once you’ve received the deposit in your bank, you can start the process of reconciling. Still, most business owners have their bank accounts feeding into their accounting system and start the process when the deposit appears in their feed. This is what it looks like in the Xero bank feed.
2) Obtain the Shopify Payments settlement report
Log into your Shopify account and navigate to View All Payouts
Select the date for the proper settlement amount you are going to reconcile
Export as a CSV file
3) Gross-Up the Settlement Net Deposit
Note: You’ll need to have added all of the accounts in your accounting system’s Chart of Accounts for this to work. If you miss an account during this step, you’ll need to back out of where you are, add the account, and start this step again.
a) Find the deposit in Xero and drill into it by clicking Add Details on the bottom right of the reconcile pane.
b) Looking at your CSV report, start entering the accounts and amounts. Make sure your total at the end nets to the deposit amount. The goal here is to add your revenue amounts and the related costs, so the combined total nets to the deposit amount. This screenshot can act as a guide.
c) Click Save Transaction.
4) Viewing the Results on your Income Statement
Now that you’ve broken out all of the income and costs in your accounting system, your Income Statement will be a lot more useful. We’ll view the Income Statement in Xero, but your work will translate through any accounting system you use, including QuickBooks Online.
a) To view your Income Statement, in Xero, select Accounting > Reports > under the “Financial” section, choose Income Statement. We’ll be using the “New” Income Statement report if you see two listed.
Select This Month as the “Date Range” assuming the deposit you just reconciled is this month. If not, choose the month of the deposit you reconcile so you can see the results—select Update.
(Note: If your Income Statement isn’t organized like our example, you may not have set up your Chart of Accounts correctly, or your report Layout has not been organized.)
b) Your Income Statement should now show your actual sales revenue in Income versus your net deposit (your revenue may be higher if other transactions have been coded to revenue). You should see the different accounts you used to record fees from the Settlement Report.
Here is an example of an Income Statement in Xero. It won’t always look this easy when you are running a business and have lots of deposits and expenses going on. This is merely showing what this one entry would look like.
Some accounts should be in Revenue (e.g., refunds), some should be in Operating Expenses (e.g., Advertising Fees). Your accountant can help make sure your Chart of Accounts accurately reflects certain expenses as Contra Revenue, Cost of Goods Sold or Operating Expenses.
Amazon Payments
The process to reconcile Amazon Payments is very similar to that for Shopify Payments. Here are the differences:
1) The Xero deposit has a different description. Here is an example.
2) To get the gross sale and fees, log into your Amazon Seller Central account and navigate to Reports>Payments>All Payments. The gross sale and associated Amazon fee will both be listed.
Here is an example:
3) Follow steps 3 & 4 from the Shopify Payments section.
Paypal Payments
Payments come through the Xero bank feed separately from the fees. The cash receipt/spent should be coded to revenue, and the fee should be coded to merchant fees. Here is an example of how a payment, the corresponding fee, and a refund look in the PayPal account:
That wasn’t that hard, right? Hopefully, you feel more comfortable with the process and should record the detailed amounts in your accounting system to better manage your business. It would be best if you did this for any sales channel you sell on.
Although you are now “able” to record these entries, the question is, should you? You’re a business owner, not an accountant. Additionally, you’ve learned the old-fashioned way to do this. What if there was a system that can automate this process for you, freeing up your time, reducing the chance of error, and create a much more scalable workflow?
Well, there is, it’s called A2X!
Scale By Automating Manual Processes
We work to automate any process we can for our customers’ accounting workflow. Why? To reduce error and to establish a scalable solution. eCommerce companies must be built to scale, or things will get out of control quickly!
A2X has automated the Shopify settlement process. A2X loads an entry in your accounting application that matches the net deposit you receive and breaks out the payment into its components just like we described above. The best part is the entry can be set to post automatically.
Once you’ve configured your account mapping in A2X (remember the accounts you used in the steps above?), A2X will allocate all of Amazon’s fees accordingly.
After that, you’ll monitor the reconciliation progress for payments all payment gateways, in the A2X dashboard. Here are examples of payments from Shopify Payments and Amazon Payments.
Once A2X has done its thing, this is what you’ll see in your accounting system. That’s it. Simple and automated. All you need to do is hit “OK.”
Next Steps
Hopefully, you’ve found this step-by-step guide useful. You now understand precisely what Shopify is doing with your settlement deposits, how to record them in your accounting system, and that you can automate this process using A2X.
If you need help implementing A2X or modernizing your accounting tech stack and financial reporting, reach out, we’re here to help.
