How to Reconcile Online Payments & Fees Received from a Credit Card Processor

Welcome to the Fit Small Business Xero training course! In the previous lesson, we showed you how to get paid faster by accepting online payments from your customers. In this lesson, we are going to cover how to reconcile online payments and fees from a credit card processor in Xero.

You can follow along on your own Xero account. If you don’t have one already, click here to sign up for a free 30-day trial and follow along below.

To complete this lesson, you can either watch the video below, read through the step-by-step instructions, or do both. Let’s begin!

Why It’s Important to Reconcile Online Payments & Fees

As we discussed in the how to reconcile bank accounts lesson, reconciling is the process of making sure that your bank account matches your accounting software. This also applies to online payments from customers that have been credited to your bank account along with any fees the merchant has charged you.

For the purposes of this lesson, we will use our PayPal account to demonstrate this concept, but keep in mind that the steps will vary depending on the payment service that you use.

How To Reconcile Online Payments & Fees

Follow the steps below to reconcile online payments and fees. We’ll be using PayPal as an example, but the reconciliation process should be similar for other payment processing services.

Step 1 – From the Xero Dashboard, scroll down to your PayPal bank account as indicated in the screenshot below.

Step 2 – Click on the blue button that says “Reconcile 4 items” as indicated in the screenshot below.

Note: Anytime the Balance in Xero (2.64 above) does not match the Statement balance (2.31 above), this means that you have items that have downloaded from your payment service (merchant) that have not been matched up with transactions in Xero.

Step 3 – The following screen will show the details of all unreconciled transactions; a brief explanation is provided below.

1. Review your bank statement lines – On the left side of the screen is a list of the transactions that have automatically downloaded from PayPal. In the how to set up a bank account lesson, we showed you how to set up bank feeds. Be sure to watch this video tutorial to learn how to setup a bank account. Note: A PayPal bank account must be set up to track payments received; however most merchants will deposit directly to your existing business checking account.
2. Transactions in Xero – On the right side of the screen are the transactions that have been recorded in Xero. As you learned in the last lesson, when a customer makes a payment, Xero will reduce the accounts receivable balance and mark the invoice as paid behind the scenes. Xero will also record the fee charged by PayPal if you chose to have Xero automatically record the fee when you set up the PayPal account in Xero; otherwise, you will need to create a spend money transaction to record any merchant fees that have been deducted from your account. We will demonstrate how to do this next.

Step 4 – Confirm “Matched” Transactions.

Xero will attempt to match transactions that have downloaded from your bank/merchant to transactions that you have been recorded in Xero. These transactions will have “OK” next to them as indicated in the screenshot below.

1. This customer payment of 1.00 was processed through PayPal on Jun 27 as indicated on the left hand side of the screen; on the right side is the payment that was recorded in Xero automatically on June 27 once the payment was made by the customer online. Note: The reference # located at the very bottom for both sides also confirms that this is a good match.
2. This item is a customer payment of 2.00 processed on June 28 as indicated on the left hand side of the screen; on the right side is the payment that was recorded in Xero automatically on June 27 once the payment was made by the customer. Note: The reference # located at the very bottom for both sides also confirms that this is a good match. Click the “OK” button to accept the match.
3. This is a fee that was charged by PayPal on June 28 for 36 cents as indicated on the left side of the screen; on the right side is the fee that was recorded in Xero for the payment made for Invoice #10020. Note: This transaction was recorded as a spend money transaction because it was deducted from the PayPal account.

Click the “OK” button for each of these transactions and Xero will mark them as reconciled.

Step 5 – Reconcile “Unmatched” Transactions.

For transactions that Xero could not find a match for, you will need to locate the transaction in Xero that it should be matched up with, or add the missing transaction directly in the reconciliation window.

In our example, there is one transaction that was not matched as indicated in the screenshot below.

This unmatched item is a PayPal Fee that was charged on June 27 for 33 cents. The transaction # indicated is the same transaction # for the June 27 payment that was received for 1.00. Therefore, we can assume that this is the processing fee for that payment.

With this information, we need to create a spend money transaction by completing the Who, What and Why info as indicated in the screenshot below. Note: You will need to set up a separate account to keep track of payment processing fees.

Once you have completed all of the fields, click the “OK” button to reconcile these transactions.

Step 6 – Reconciliation Complete.

Once you have reconciled all transactions, you should see a notification similar to the one below.

If you are having a difficult time reconciling, refer to the reconciling tips that we shared in the how to reconcile a bank account video tutorial for help.

Wrap Up

That wraps up the section on how to reconcile online payments and fees from a credit card processor. The next lesson in our Xero Training Course will be how to create an Income Statement. In this lesson, we will walk you through how to create and customize an Income Statement. To access this lesson or any of the others in the series, click here. For a free 30-day trial of Xero, click the link below.