How to account for payment processing fees?

Navigating the Murky Waters: Accounting for Payment Processing Fees

In today’s digital marketplace, accepting payments online or via card is virtually non-negotiable for businesses of all sizes. However, the convenience comes with a cost: payment processing fees. Understanding how to properly account for these fees is crucial for accurate financial reporting and a clear picture of your profitability. Ignoring this aspect can lead to skewed results and misinformed decision-making.

So, where exactly do these fees fit into your financial statements? The answer, unfortunately, isn’t always straightforward. The standard approach involves expensing payment processing fees, but the specific categorization depends on the nature of your business and the relationship of the fees to your sales revenue. Generally, you’ll find them categorized under either Selling, General, and Administrative Expenses (SG&A) or Cost of Goods Sold (COGS).

Let’s break down each option:

1. Selling, General, and Administrative Expenses (SG&A):

This category encompasses the costs associated with the overall operations of your business that aren’t directly tied to the production of goods or services. Think of it as the “running the business” expenses.

• When to use SG&A: This is the more common approach and is typically appropriate when payment processing fees are viewed as a necessary cost of doing business, regardless of specific product sales. This is often the case for businesses where payment processing is considered a general operational expense.
• Examples: Businesses that predominantly sell services, or those where payment processing is integrated into their broader marketing and customer service activities, might categorize the fees under SG&A.
• Impact: Allocating fees to SG&A portrays them as operational expenses, impacting the overall profitability metrics.

2. Cost of Goods Sold (COGS):

COGS represents the direct costs associated with producing the goods or services you sell. This includes raw materials, direct labor, and any expenses directly attributable to bringing a product to market.

• When to use COGS: If the payment processing fees are directly linked to the sale of specific products or services, and are essential to making those sales, allocating them to COGS may be more accurate. This is often used when fees are directly added to the cost of the product.
• Examples: Consider a business that heavily relies on online sales for physical products. If a significant portion of their COGS is raw materials and shipping, including the payment processing fees in COGS provides a more complete picture of the true cost of bringing each product to the customer.
• Impact: Allocating fees to COGS directly impacts the gross profit margin, providing a clearer understanding of the profitability of individual products or services.

Making the Right Choice:

The key to deciding between SG&A and COGS is to consider the directness of the relationship between the payment processing fees and the sale of specific goods or services. Ask yourself:

• Are these fees a general cost of accepting payments, or are they inherently tied to specific product sales?
• Would the sale have occurred without accepting payments via these methods?

Consistency is Key:

Regardless of which category you choose, consistency is paramount. Stick to your chosen method from period to period to ensure accurate comparative financial analysis. If you decide to switch your accounting method, consult with a qualified accountant to ensure compliance with accounting standards.

Beyond Expense Allocation:

• Consider Tracking: Implement a system to track payment processing fees separately. This could involve using specific GL accounts or accounting software features.
• Analyze Fee Structures: Regularly review your payment processing fee structure to identify potential cost savings. Negotiate with your provider or explore alternative payment methods with lower fees.
• Consult with a Professional: When in doubt, consult with a qualified accountant or financial advisor. They can help you determine the most appropriate accounting method for your specific business and ensure compliance with relevant regulations.

By understanding the nuances of accounting for payment processing fees, you can gain a more accurate and insightful view of your business’s financial health and make informed decisions to optimize your profitability. Don’t let these seemingly small fees get lost in the shuffle; they can have a significant impact on your bottom line.