During business operations, when using Square as the payment processing channel, the handling of fees often confuses merchants. A user recently asked in a financial community:"I currently use QuickBooks Online (QBO), but I have never included Square fees in my books. My approach is: after creating an invoice, I only reconcile the actual bank deposit amount with the invoice amount, but I do not separately record the fees. What is the correct way to record this?"

For this common issue, financial professionals recommend the following steps to ensure accurate books and compliance with accounting principles:

Why must fees be recorded separately?

Square deducts a certain percentage of fees from each transaction and then deposits the net amount into your bank account. If you only record the net deposit and ignore the fees, revenue will be understated and expenses will be omitted, which affects the accuracy of the income statement and tax filings. Therefore, recording fees as a separate expense account is the foundation of proper bookkeeping.

Standard process for recording Square transactions in QBO

  1. Create an invoice or sales receipt:In QBO, create an invoice or sales receipt for the actual sales amount (before fees) to recognize full revenue.
  2. Record the bank deposit:When the bank receives the net amount deposited by Square, record that deposit in the QBO bank account and link it to the corresponding customer or sale.
  3. Record the fee separately:Record the fee as an expense under an account such as "Bank Fees" or "Payment Processing Fees." Specifically: add a new expense in the bank account for the fee amount, and select "Payment Processing Fees" or "Bank Fees" as the category.
  4. Reconcile the difference:Ensure that "Invoice Amount - Fee = Bank Deposit Amount." If there is a discrepancy, check for refunds, disputes, or delayed settlements.

Example illustration

Suppose you issue a $100 invoice to a customer, and Square charges a fee of 2.9% + $0.30 (i.e., $3.20), then the actual bank deposit is $96.80. The correct recording would be:

  • Accounts Receivable (or Revenue): $100
  • Bank Account (Cash): $96.80
  • Payment Processing Fees (Expense): $3.20
Note: Fee rates may vary for different Square accounts; please refer to the actual deduction. If you use Square's point-of-sale (POS) system, you can also use third-party apps (such as Square's integration with QBO) to automatically sync transactions, but you must manually confirm the fee categorization.

Other considerations

If you have not recorded fees for a long time, it is recommended to make adjusting entries: retroactively record all Square fees from historical periods as expenses and adjust the revenue or bank balance for the corresponding periods. If tax filings are involved, consult an accountant to ensure compliance.

In summary, recording Square fees separately as expenses is key to keeping your books clear and accurate. By following the above process, you can easily resolve the confusion of "bank deposit not matching invoice amount" and ensure that financial statements truly reflect business operations.