What is a Balance Account?
A balance in an asset account reflects the amount you have at any given time; think of it as similar to the balance in your bank account. In financial platforms like QuickBooks or Xero, these are referred to as balance accounts.
Consider how you use Square in your retail or restaurant business. Just like your bank account, you accumulate a balance with Square. It's crucial to treat this Square balance with the same consideration as your bank account balance.
Each balance must be represented by a separate account in QuickBooks or Xero. You wouldn’t merge two different bank accounts into one in QuickBooks, right? The same principle applies here: ONE BALANCE ACCOUNT PER BALANCE.
Common Misconceptions and Best Practices
It might seem obvious to keep these accounts separate, but errors are common. For instance, if you operate three restaurants, each with a Square location, it might be tempting to consolidate these into a single QuickBooks account. However, doing so would prevent accurate reconciliation of sales to payments. Each deposit source, like an Amazon Seller account, should have its own dedicated balance account to ensure clarity in your financial reporting.
The key thing to remember is to set up one balance account for each regular deposit you get.
Journal Entry Practices for Multiple Platforms
Common journal entries we summarize include both sales and deposits on a daily basis. We book your sales from the prior day which may contain a number of tender types e.g. Stripe, Square, Shopify, etc. Additionally, we capture any deposits coming to your bank account related to those sales.
Amazon Seller
Amazon Seller is a marketplace and you accrue a balance as you sell. Daily sales are booked against a specific "Amazon Balance" account. In subsequent postings, we will reduce the balance account when Amazon transfers the balance to your bank checking account.
Shopify and PayPal
In this Shopify Summary example below, this customer completed sales that were processed by PayPal and Shopify.
Since Shopify is acting as a Sales Platform and a Payment Platform we book the increase in the Shopify Balance.
For PayPal, we use an Intra-App clearing account to track what Shopify says was transacted on PayPal against what PayPal says.
As these sales occur, the balances in their Shopify and PayPal Intra-App clearing accounts are increasing. This is similar to an expected deposit. However, you may choose to keep this balance with Shopify or Paypal (meaning you don't get it deposited to your checking account) which is essentially acting as a bank account.
The Dynamics of Balance Accounts
As sales occur, balance accounts like those for Shopify and PayPal grow, similar to expected deposits. You might choose to retain these balances within the platforms or transfer them to your bank account, which would be recorded as a deposit journal entry.
In the example below, Shopify is also taking out some fees which reduce the actual amount hitting your bank account. As you can see the Shopify balance account is being reduced as money deposits to your bank:
Balance accounts are becoming more common with the many sales platforms and payment platforms used by retailers and ecommerce sellers. As sales occur, the balance account increases and, with each deposit to your bank, the balance account decreases. With the linkage between the two, we recommend mapping the balance account in the sales and deposit journal entry templates to the same account to ensure the increase and decrease between sales and deposits is easily reconciled.