Payment processors deposit net of fees, so the money arriving in your bank is never the money your customers paid. Reconciling against the deposit understates revenue and hides processing costs entirely. The fix is a clearing account: record gross sales into a processor clearing account, then record each payout as a movement out of that account with the fee posted separately to an expense line, so the net matches the bank deposit exactly. At period end the clearing balance should equal precisely the sales taken but not yet settled. Budget about ninety minutes per processor the first time, and twenty minutes a month afterwards.
This is the reconciliation small businesses get wrong most often, and it is expensive to get wrong twice over. It understates revenue, which makes the business look smaller than it is on any statement a lender or buyer reads. And it makes processing fees invisible, which for a business doing $2M through cards is roughly $58,000 a year of expense that appears nowhere anyone would look for it.
Why the deposit is not the revenue
A customer pays you $1,000 by card. Stripe takes 2.9% plus 30¢, so $29.30. Two days later, $970.70 lands in your bank.
If you categorize that bank line as income, three things are now wrong. Revenue is recorded as $970.70 instead of $1,000. The $29.30 expense does not exist anywhere in your books. And the invoice you sent for $1,000 is still showing as unpaid, because nothing matched it.
Multiply by a year. A business processing $2M through cards at roughly 2.9% is understating revenue by about $58,000 and omitting $58,000 of expense. Net income happens to come out right, which is exactly why this survives so long undetected — the bottom line looks fine while both lines above it are wrong.
Usually a lender or a buyer, at the worst possible moment. Understated revenue depresses every multiple and every ratio built on top of it. And an owner who cannot say what card processing costs them cannot negotiate it, which for most businesses is the single most negotiable line in the P&L.
What you need before you start
- The settlement or payout report for the period, from the processor's own dashboard. In Stripe this is under Balance then Payouts; in Square, the Transfers report; in PayPal, the Activity or Settlement report. Not the summary of deposits from your bank.
- Your bank statement for the same period.
- Your fee schedule, so you can sanity-check the effective rate afterwards.
- A decision on scope. If you run three processors, each gets its own clearing account. Do not pool them.
The settlement report is the one showing gross sales, fees, refunds and payouts as separate figures. If the report you have shows only the deposit totals, it is the wrong report and you cannot do this reconciliation with it.
Setting up the two accounts
1. The clearing account
In Transactions → Chart of accounts → New, create an account of type Bank, and name it for the processor — "Stripe Clearing", "Square Clearing". Bank type matters: it makes the account reconcilable and puts it in the current assets section, which is what it is.
This account represents money that belongs to you, that the processor is holding, that has not yet reached your bank. That is a real asset and it deserves a real account.
2. The processing fees expense account
Create an Expense account with a detail type of Bank charges, named "Merchant processing fees" or similar. One account per processor is unnecessary; one account with the processor identified in the memo is easier to read.
Most small businesses put processing fees in operating expenses, and that is the conventional treatment. Businesses on very thin margins sometimes argue for cost of goods sold, so gross margin reflects the true cost of accepting a card. Both are defensible. What is not defensible is switching mid-year — it makes your gross margin trend meaningless, which is the one number job margin analysis depends on.
The monthly procedure
3. Record gross sales into the clearing account
When you receive a customer payment, deposit it to the clearing account, not the bank, and record the full gross amount. The $1,000 invoice is paid in full and closes properly. Your receivables are accurate. Nothing has been netted yet.
4. Record each payout, with the fee split out
Now the payout. Use + New → Bank deposit, or a transfer, with the deposit account set to your real bank account, and build it as two lines:
- A line moving the gross figure out of the clearing account.
- A line for the fee, coded to processing fees, entered as a negative.
The total of those two lines is the net, which equals the bank deposit exactly. Gross revenue is intact, the fee is now a visible expense, and the bank reconciles on a single matching line.
A Stripe payout of $9,710.40 covering $10,000 of gross sales. One line moves $10,000.00 out of Stripe Clearing. A second line posts −$289.60 to Merchant processing fees. Net $9,710.40 — matching the bank line to the cent.
For high volume, recording every individual sale is impractical. Post a single daily or weekly summary of gross sales into the clearing account instead, then the payouts against it. The principle is unchanged; only the granularity moves.
5. Record refunds and chargebacks
A refund is a reduction of revenue, not an expense. Post it against the income account it originally hit, through the clearing account, so both revenue and the clearing balance reflect it.
A chargeback is two events and should be recorded as two: the reversal of the sale, and the chargeback fee. Booking the combined figure as one expense hides the fact that revenue was reversed, which matters when you are trying to work out whether disputes are trending.
6. Reconcile the bank
Every net payout should now match one bank line exactly. Reconcile normally, per the month-end close checklist.
7. Prove the clearing balance
This is the step that makes the whole method worth using. At period end, the clearing account balance should equal exactly the sales the processor has taken but not yet paid out — which the settlement report tells you.
If it matches, the reconciliation is genuinely correct rather than merely balanced. If it does not, you have a specific, findable error rather than a vague sense that revenue looks low.
The month-boundary trap
Sales on the 30th and 31st settle on the 1st and 2nd. This is where most processor reconciliations quietly fail, and it is worth understanding rather than working around.
The sale belongs to the month it happened. The deposit belongs to the month it arrived. They are different months and both are correct. The clearing account is what holds the difference — that is its entire purpose.
Without a clearing account you have to choose between two wrong answers: count the sale in the month the cash arrived, which understates the month it was earned in and overstates the next; or count the deposit in the earlier month, which means your bank reconciliation is off by the settlement amount. Neither is fixable without the account, which is why "just categorize the deposit as income" collapses at every month end.
Roughly two business days for Stripe on a standard payout schedule, one to two for Square, and near-immediate for PayPal balance with one to three days to transfer out. Verify against your own account — timing varies by risk profile, account age and payout settings, and a rolling reserve changes it completely. The number that matters is the one on your settlement report, not the published default.
Common problems
The clearing account balance keeps growing
Sales are going in and payouts are not coming out. Usually payouts are being categorized straight to income from the bank feed instead of being recorded against the clearing account — so the money is being counted twice on the way in and never removed. A clearing balance that only ever rises is the symptom.
The clearing account goes negative
Payouts are being recorded without the matching sales. Common when the connector posts payouts automatically but sales are entered manually and someone falls behind.
The fee total looks wrong
Divide total fees by total gross for the period and compare to your headline rate. Landing materially above it usually means chargeback fees, currency conversion, instant-payout fees or monthly platform charges have been folded into the same line. Those are worth separating — they are negotiable in ways the base rate is not.
The automatic connector is posting net
Some integrations record only the net deposit, which reintroduces exactly the problem this method solves. Run one month and check that gross revenue and fees appear as separate lines before trusting any connector. Convenience that quietly loses your processing cost is not convenience.
Sales tax on card sales
Sales tax collected is a liability, not revenue, and processors deposit it along with everything else. If you collect sales tax, the gross line splits further — revenue and sales tax payable — before the fee comes off. Getting this wrong overstates revenue by the tax you are holding on someone else's behalf.
How long this takes
Setup is genuinely one-time. Once the accounts exist and the pattern is established, the monthly work is short — matching payouts and proving the clearing balance.
Retrospective cleanup is the expensive one. A year of net-recorded deposits means reconstructing gross revenue and fees month by month from settlement reports. Two to four hours per processor is realistic, and it is worth doing before a lender or buyer asks rather than after.
When it stops being worth doing by hand
The method is not difficult. It is just relentless — every month, per processor, forever, and it has to be right because everything downstream depends on it.
The signal to hand it off is usually the third processor. One is manageable. Two is a routine. Three means each month you are proving three clearing balances against three settlement reports on three different timing cycles, and that is the point where it stops being bookkeeping and starts being a job.
Have one month reconciled properly, once
The First Close reconciles every processor you run against your ledger — gross revenue and fees separated, clearing balances proved, every gap flagged with the transaction behind it. One real month of your books, inside two weeks. $497, refundable if the packet is not delivered, credited in full toward the first month if you continue.
Get Your First Close — $497 See a sample packetCommon questions
Why is my Stripe deposit less than the invoice amount?
Processors deposit net of fees. $10,000 of card sales arrives as about $9,710. Recording the deposit as revenue understates revenue and omits the fee entirely.
Are payment processing fees COGS or an operating expense?
Usually an operating expense with a Bank charges detail type. COGS is defensible on thin margins. Pick one and never switch mid-year — it destroys your margin trend.
What is a clearing account and why do I need one?
Holding money the processor has collected but not yet deposited. At period end its balance should equal exactly the sales in transit.
How do I handle a sale at the end of the month that settles next month?
Both, correctly. The sale is in the month it happened, the deposit in the month it arrived, and the clearing account holds the difference.
Should I use the automatic Stripe or Square connector?
Only after verifying it posts gross revenue and fees separately. Some record only the net deposit, which recreates the problem.
How do I record a chargeback?
As two entries — the reversal of the sale against revenue, and the chargeback fee against processing fees. Combining them hides the revenue reversal.