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Clearing account: Key to organising your ecommerce accounting

Versha Kamwal
February 17, 2021
5
mins read

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As the Indian ecommerce is evolving, customers prefer electronic payment methods for their ecommerce sales, including credit cards, debit cards, and UPI (Unified Payment Interface). Ecommerce merchants now have to rely on a third-party to support their payment processing. Such as payment providers like Paytm, payment processors like Razorpay, and marketplaces like Amazon.

It is essential to accurately account for the payments you receive for your ecommerce sales. You need to maintain a ledger for every provider that collects payment from your customers and configure them in your accounts. It may seem convenient to manage your ecommerce sales by booking transactions to an undeposited funds account. However, it will only complicate the process of reconciling payout deposits and won't be sufficient to address the numerous transaction types (e.g., sales, sales-related expenses, refunds, and reimbursements).

Essentially, when you sell on marketplaces like Amazon, Flipkart, and more the flow of payments is indirect. These marketplaces collect payments from your customers and make payments to you according to their payout cycle. This amounts to a lot of transactions in an unorderly manner which makes recording and reconciling payments difficult.

As a solution, you can configure clearing accounts for every payment provider that collects your customers' payments and settles to your bank account. Having a clearing account in place helps you to:

  • Manage each payment provider's ledger
  • Track your itemised sales, sales-related expenses, refunds, and reimbursements.

What is a clearing account and how does it work?

A clearing account is a temporary account in the general ledger, containing transactions that haven't been billed and have to be transferred to other accounts later. This account is opened in the general ledger on a temporary basis, and its purpose is that of a reminder. Generally, it is used as a way to track and reconcile transactions that are in process. Once the payments of these transactions are made, they are posted in the designated account and removed from the clearing account.

However, if you use just one clearing account it will not be sufficient to record all sorts of transactions. You need to create individual clearing accounts for every third-party payment provider.

Let us understand how clearing account works with an example. Let's say, if you sell on Amazon, you can do the following to accurately track Amazon's sales and expenses:

  • First, configure a bank account within the accounting file named “Amazon Clearing.”
  • Then, import all Amazon transactions including sales, expenses, refunds, and reimbursements to Amazon clearing account.
  • Finally, when Amazon makes payout deposits to your bank account, directly treat those deposits as transfers from the Amazon Clearing account to your bank account.

Clearing account
Clearing account
Using clearing account to book Amazon transactions

You should check the balance in your clearing accounts regularly. If you don't get zero as your balance, the following could be the reason:

  • You haven't received payment for invoices yet.
  • You have received the payment in your bank account but have not booked the sales in the corresponding clearing account.

How to identify which clearing accounts you need?

You need a clearing account configured within your chart of accounts for every provider that collects payments from your customers.

Let's take an example, Victory Sports sells sports gear on its own website where they accept debit card and credit card payments (powered by Razorpay), and digital wallets (powered by Paytm). In addition to selling from their own website, the company also sells its products on Flipkart.

Here, Victory Sports will need to set up the following clearing accounts:

  • Razorpay Clearing
  • Paytm Clearing
  • Flipkart Clearing

A chart of accounts is a list of categories used by a business or company to classify and distinguish financial assets, liabilities, and transactions.

How to create clearing accounts?

To create a clearing account, you can check out the process entailed by accounting software like QuickBooks, SAP, Tally and Xero. If you use some other software, you can reach out to your accounting software provider to know how to set up clearing accounts.

Bottom line

Clearing accounts are often preferred in ecommerce transactions due to the fact that it takes a substantial amount of time till payments are deposited to the ecommerce merchant’s bank account. They serve as a great way for managing the money flow and staying on top of cash traffic patterns. If you’re looking for better transparency and cleaner accounting ledgers, clearing accounts could be the solution.

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