A transaction received through Shopify from your bank account is not the same as reconciled revenue. The deposit totals gross revenues, refunds, chargebacks, and processing fees from several transactions on different days into a single net amount. Misinterpretation of accounting and VAT treatment of such figures is one of the most common causes of noncompliance for internet sellers in the UK.
What Payout Reconciliation Actually Means
The payout reconciliation process specifies all phases in which the client’s payment flows from the initial order to the payment processor via Shopify, to the bank account, and finally to the accounts. When done correctly, it can identify any discrepancies between the client’s payment and the amount sent into the bank account. You no longer need to rely on manually altered journal entries to balance the accounts.
VAT is very significant to UK businesses. In most circumstances, VAT must be calculated based on gross income from sales, which is the whole payment paid by the customer, rather than the net payout after Shopify reduction. This means that calculating payment as turnover can result in an inaccurate estimate of sales revenue and VAT liabilities.
Why Shopify Revenue and Bank Deposits Never Match
There are several causes for this, and each factor is treated separately in accounting rather than being merged.
- Payout fees are removed from the payment before it is executed, so you received the amount less these costs.
- The refund sent to your client can be included in the following payment period after the initial transaction, resulting in a discrepancy between accounting and VAT periods.
- Chargebacks and payment disputes must be addressed separately from routine reimbursements.
- Purchases made in the last days of a VAT quarter can take some time to complete and can be paid out in the next quarter.
- Varied payment methods, such as PayPal, Klarna, and gift cards, have varied settlement timeframes. There can also be enterprises that sell abroad and hence receive payments in many currencies.
- The Shopify payment report does not provide a VAT breakdown acceptable for UK accounting.
Four-Layer Reconciliation Method
The establishment of a consistent Shopify payment reconciliation method occurs in various levels, rather than directly comparing Shopify order amounts to bank statements.
Order to Transaction
Ensure that the order has been handled and that any transactions linked to it, such as partial captures and order modifications, have been logged.
Transaction to Payout
Match each transaction to the corresponding Shopify payment. A refund or chargeback can be included in another payout. Therefore, each transaction must be recorded individually.
Payout to Bank
Check that you have received the right amount for a payout on time in your bank account. Investigate probable reasons for delays, payments on hold, and currency problems.
Bank to Accounting Ledger
Enter the transactions into your accounting system into a special Shopify clearing account, and record gross sales, payment processing costs, and VAT separately from the net amount.
Recording Gross Sales, Fees and VAT Correctly
Every Shopify payout must be reported in accordance with the same accounting procedures.
- Record gross sales from Shopify’s financial accounts using the relevant VAT rates, and apply output VAT where applicable.
- Do not include Shopify’s processing fee and subscription costs in your sales income. Instead, report them separately as business expenditures.
- Record the refund or chargeback for the specific period when it occurs so that both the revenue and output VAT can be recorded correctly.
- These transactions must be handled through a Shopify clearing account rather than immediately recorded in your bank account.
- Clear the clearing account balance to reflect the payout received.
For businesses that utilise the VAT accounting scheme, gross sales for VAT purposes are typically recorded in Box 1 (output VAT) and Box 6 (net value of sales). The recovered VAT from qualified costs and purchases can be recorded in Box 4, while the net value of the transaction is entered in Box 7. The Shopify payment is not recorded on the VAT Return because it simply represents the settlement of your transactions.
Using a Clearing Account
The Shopify clearing account functions as a provisional holding account until all of the transactions that comprise the payment balance out. Gross sales are recorded in both your sales and clearing accounts, whereas transaction processing charges can be recorded as company expenditures, and refunds can reverse sales and clearing account balances. When the payoff arrives in your bank account, the clearing account should balance to zero. This way, you can have an audit trail and a complete reconciliation against your bank feed, eliminating the need for human modifications.
Handling Refunds and Timing Differences
Refunds are one of the most common complications that emerge when doing bank reconciliation and VAT reporting since the refund procedure and settlement date can be inconsistent with the same period, and can even belong to two different VAT periods. In such circumstances, the reimbursement should be recorded against sales (including output VAT) at the time of processing, while the clearing account represents the moment of cash flow settlement.
A Practical Monthly Control Procedure
Daily or after each payment:
- Check that all Shopify payments were received in your bank account as planned.
- Investigate any odd deductions, holds, or adjustments to payments.
Weekly
- Conduct an inquiry into mismatched transactions.
- Investigate any overdue refunds and external payments.
Month end
- Perform a reconciliation of the Shopify clearing account to return its balance to zero.
- Check to see if VAT was computed using gross sales rather than net payments.
- Make a note of any pending reconciliations and specify when they can be handled.
Software that facilitates the workflow
Manual reconciliation of Shopify payments gets increasingly difficult as more orders come in. Integration software such as A2X, Link My Books, and Synder connects Shopify to Xero or QuickBooks, automatically recording gross sales, payment processing fees, refunds, and VAT through a clearing account, making it simple to reconcile bank deposits. However, integration software needs the proper nominal accounts, VAT rates, and accounting setup, which must be completed by a qualified accountant.
How UK Ecommerce Accountants Can Help
Inaccurate Shopify payout reconciliation can have a negative impact on your profitability as well as your VAT returns. Incorrect Shopify payment reconciliation is one of the most common issues we experience when onboarding new ecommerce customers at UK Ecommerce Accountants. We help our Shopify merchants develop a reconciliation procedure to verify that their accounting data is correct and tax compliant.
We provide the following services:
- Creating and configuring Shopify clearing accounts in Xero or QuickBooks with the proper nominal codes.
- Recording total sales, fees, refunds, and VAT from the Shopify payout report to ensure that your VAT return is calculated based on gross taxable sales rather than net payments.
- Reconciling Shopify Payments with payment gateways such as PayPal and Klarna.
- Setting up and evaluating the A2X, Link My Books, and Synder integrations to automate your future reconciliation processes.
- Resolving any historical VAT difficulties caused by incorrect VAT return preparation, such as recording net payments rather than gross sales.
- Using reconciled financial information, prepare MTD-compatible VAT returns and monthly management accounts.
We can help you build up your Shopify payment reconciliation procedure from the beginning or correct several months of unreconciled transactions.
FAQs:
Should I record my Shopify payout or my gross sales as revenue?
Your income must be calculated based on the gross quantity of sales produced. The Shopify payout is the net amount after paying the costs for processing payments, refunds, and chargebacks. If your sales transactions include VAT, your company’s VAT accounting must be based on the gross amount of the sales transactions rather than the net payout.
Why does my Shopify payout never match my daily sales figure?
It is critical to remember that Shopify payments can not always correspond to your sales transactions for the day because orders can be processed, refunded, or even chargebacks can occur at various times of the day, not always at the same time as the sale transaction.
Is VAT charged on Shopify’s processing fees?
No. Payment processing fees are often handled independently from Shopify subscription prices. If you are a UK firm that uses Shopify Payments, the payment processing fees are normally VAT-free. However, depending on how the service is offered, the Shopify membership and other platform payments can be subject to a reverse charge.
Do I need reconciliation software, or can I do this manually?
If you have a limited number of orders in your Shopify store, you can reconcile your payouts without automation. As your firm grows, it is ideal to automate tasks using software such as A2X, Link My Books, or Synder.
What happens if I have been reporting VAT on net payouts instead of gross sales?
If you submitted VAT using net payouts rather than gross amounts, your VAT returns can be incorrect. It is advised that your accountant review previous VAT periods and make any required modifications
