Lately, I have been exploring best practices for ecommerce bookkeeping. Daily Summaries by Platform and Accrual Basis both make better comparison and prediction possible. But the secret behind these approaches to ecommerce bookkeeping is a tweak to the Chart of Accounts.
Truth: Best practice ecommerce bookkeeping is fueled by Clearing Accounts.
Sometimes called “balance accounts” or “zero accounts”, Clearing Accounts have one purpose - isolating transactions to “clear” them more easily. No matter the criteria you are using to match those transactions, Clearing Accounts are the special ‘rooms’ allowing a focused approach. They speed up the reconciliation process – a lot.
How Clearing Accounts Work
Clearing Accounts relocate certain reconciliations OUTSIDE the bank ledger. Instead of reconciling sales to expected deposits to bank deposits, both the sales detail and bank deposit are booked to a Clearing Account. Here the target balance is almost always zero. The deposits booked from the bank feed offset the expected net sales after all the adjustments. Transactions are more easily matched and it doesn’t have to happen during the bank reconciliation.
You may be thinking, “Focused reconciliation? Special ‘rooms’? I’m stocked up on busy work, thanks.”
Great! Because when combined with automation, these gems will decimate your busy work while keeping all the benefits of the best practices intact.
Clearing Accounts Clear the Way
Using Daily Summaries by Platform and Accrual Basis accounting generates a lot of data. More platforms mean more summaries and those mean more individual deposits hitting the bank. Any benefit is quickly swallowed by a data avalanche. Clearing Accounts help keep the increased detail from causing an increased headache.
1. Let Bank Recs be Bank Recs
Clearing Accounts let you do one reconciliation at a time.
One example is my own Etsy shop. If expected deposits for the day are booked to the bank, then when I reconcile my bank I also need to match the sales to Etsy’s bank deposit. After all, I want to make sure I got all my money!
Unfortunately, these rarely match one to one, which means I cannot reconcile the bank item until I reconcile that sale to what I have booked. Basically, my bank reconciliation is held up by my sales and fees to deposits reconciliation. Unfortunately, reversing the approach is no solution – the recs still depend on each other.
Some tools, like Bookkeep, were built to solve these problems. Daily Sales Summaries are entered automatically, including the expected deposit. This makes reconciling the bank and sales to deposits a lot easier to do together.
Still, Bookkeep uses Clearing Accounts, or what they refer to as Balance Accounts, to keep these reconciliations separate from the bank feed. Why? Because they know these are crucial tools for ecommerce bookkeeping for other reasons too.
2. Let Bank Feeds be Bank Feeds
Clearing Accounts keep bank feeds about the activity, not the reconciliation.
Keeping up with bank feeds keeps you on top of what is happening in the bank between reconciliations. They are great tools for cash flow and cash available for use by the business. Knowing what has cleared and what might still be outstanding is great intel!
This is why many of us ask our clients to process the bank feed regularly – so they have the benefit of this information as they go along. It also helps break the nasty habit of using their checking account balance to make decisions.
But bank feeds are like a reconciliation-lite. Whatever complication you might encounter during reconciliation can mess with processing the bank feed.
The reality is that the potential for wrong, missed, or duplicated deposits is very high. Just like that, the benefit your clients get from helping, like monitoring cash flow, goes out the window along with any time you might have saved in your own work. It is a lose-lose. Client ‘help’ with bank feeds becomes no help at all. To anyone.
This is where Clearing Accounts come to the rescue! They make your bank reconciliations easier, so by extension make bank feeds much easier to deal with. All the sales deposits are simply booked to the Clearing Account for that platform. They can even use rules to route them to the right Clearing Account automatically. The end.
Not only do you not have to match expected sales to those deposits, but your clients also don’t either.
Clearing the View
Clearing Accounts are not just the clean-up crew for all the data brought in by Daily Summaries by Platform and Accrual Basis accounting. These overachievers can make even the most intricate books more straightforward. Because they let the Balance Sheet speak clearly again!
1. Checking Balance as Real Available Balance
Cash balances getting out of the prediction business.
When a Daily Sales Summary for a particular platform is booked, part of that transaction is inevitably what kind of cash your client anticipates for the sales reflected in that summary. However, things happen. A lot.
For my Etsy shop, a tool like Bookkeep is very good at booking the deposit I might expect for a particular day’s sales. But what is also nice is that those expected sales get booked to a Clearing Account anyway.
Then when a deposit comes in from Etsy, it is booked to that same Clearing Account. If these two cancel each other out, all’s well. But if more than one day is deposited at a time, or a chargeback is deducted, or even if Etsy just made an error, they won’t zero.
The good news is that whatever the reason for the imbalance, it was never located in the checking account. It never affects the view of available cash. Mistakes, misbookings, fees, returns - the checking account is a reflection of activity that has actually happened instead of what should happen. No more second-guessing the balance based on what might happen or when the last reconciliation occurred.
2. Clearing Account Balances as Platform Balances
Current Assets getting back into the ‘Keeping Tabs’ business.
Each Clearing Account involves only the expected deposits from one platform. Then, the actual deposits are booked there too. So, when things don’t line up, it is easy to spot.
In short, you can monitor the health of your A/R with each platform at a glance. Problems with missing, adjusted, or other unknown changes to how money flows from a platform to your client can be quite obvious BEFORE the month ends. You don’t need a full bank reconciliation to see which way the wind is blowing with each of your client’s sales platforms.
3. Balance Sheets as Trusted Tools, Again
Understanding at a glance what is real and what is expected.
This is the best part of using Clearing Accounts. The cash accounts reflect what is actually available for that account. The Clearing Accounts reflect what is actually owed by the various sales platforms. The bank feed can be processed quickly. So, it is easily checkable and obvious if any of these elements are not doing their jobs well.
The Bottom Line of Clearing Accounts
Balances in the GL communicate a number that can be read and understood. Clearing Accounts clear out the muddle of what happened versus what was expected. And this means that we, as financial professionals, don’t have to reconcile everything to sense what is going on.
Using Clearing Accounts
1. Makes your processes easier
2. Keeps your focus tighter
3. Creates insights with the kind of ‘Extra’ that…
4. Invites an easy path to advisory services for clients.
Now that is what I call an approach worth more than a passing look! Clearing accounts clarify and level up ecommerce books, and beyond!