Accounting for Stripe and Payment Processor Fees

When a customer pays by card through Stripe, PayPal, Square, SumUp, or any other payment processor, the processor deducts a fee before depositing the remaining amount into your bank account. Recording these fees correctly is essential for accurate financial reporting, proper VAT treatment, and clean bank reconciliation.

How Payment Processor Fees Work

A payment processor acts as an intermediary between your customer’s card issuer and your bank account. The processor charges a transaction fee for each payment it handles.

Typical Fee Structures

Fees vary by card type (debit, credit, corporate, international), payment method (in-person, online, invoice), and your negotiated rate. Most processors also charge for chargebacks, refunds, and additional services.

The Core Accounting Problem

The fundamental issue is that the amount appearing on your bank statement is less than the amount the customer paid. If a customer pays £120.00 and Stripe charges £2.00, only £118.00 arrives in your bank account.

You must record the full sale amount as revenue and the fee as a separate expense. Recording only the net amount received would understate both revenue and expenses.

Bookkeeping Entries

Method 1: Gross Method (Recommended)

Record the full invoice amount as revenue and the fee as a separate expense:

When the sale is made:

Debit:  Trade receivables           £120.00
Credit: Revenue                     £120.00

When the processor pays out (net of fees):

Debit:  Bank                        £118.00
Debit:  Payment processing fees       £2.00
Credit: Trade receivables           £120.00

This is the clearest approach. It shows the true revenue figure and makes the cost of payment processing visible as a distinct line in the profit and loss account.

Method 2: Clearing Account

Some businesses use a payment processor clearing account (a current asset) to handle the timing difference between the sale and the bank deposit:

When the sale is made:

Debit:  Stripe clearing account     £120.00
Credit: Revenue                     £120.00

When Stripe pays out:

Debit:  Bank                        £118.00
Debit:  Payment processing fees       £2.00
Credit: Stripe clearing account     £120.00

The clearing account approach is useful when there is a significant delay between the sale and the bank deposit, or when you process high volumes and need a clear reconciliation point.

Where to Record the Fees

In your chart of accounts, payment processing fees typically sit under:

• Cost of sales — If you treat payment processing as a direct cost of generating revenue
• Administrative expenses — If you treat it as an overhead

The classification depends on your business and how material the fees are. For an e-commerce business where card payments are the primary revenue channel, treating fees as a cost of sale gives a more accurate gross margin. For a business that primarily invoices clients and occasionally takes card payments, administrative expenses is more appropriate.

VAT Treatment of Payment Processor Fees

Payment processing fees from Stripe, PayPal, and similar providers are treated as exempt from VAT under the financial services exemption in the VAT Act 1994 (Schedule 9, Group 5).

This means:

• The processor does not charge VAT on its fees
• You cannot reclaim input VAT on these fees (because there is none)
• You do not need to account for reverse charge VAT on fees from overseas processors (the exemption applies regardless of where the processor is established)

If you use a merchant account provider that charges a monthly service fee in addition to transaction fees, the service element may attract VAT. Check each invoice from your provider carefully, as the breakdown between exempt transaction fees and standard-rated service fees varies. For more on merchant accounts, see the guide to merchant accounts.

Reconciling Payment Processor Statements

Monthly Reconciliation Process

1. Download the monthly statement or transaction report from your payment processor
2. Match each payout amount on your bank statement to the corresponding transactions in the processor’s report
3. Verify that the total sales, total fees, and total payouts reconcile
4. Post any unrecorded fees (e.g. chargeback fees, monthly platform fees)
5. Check the clearing account balance (if used) — it should equal any payouts still in transit

Common Reconciliation Issues

• Payout batching — Stripe and others batch multiple transactions into a single bank deposit, making it harder to match individual sales
• Currency conversion — International transactions may involve exchange rate differences between the sale date and the payout date
• Chargebacks — A customer disputes a charge, and the processor deducts the amount plus a chargeback fee from a future payout
• Refunds — Refunded transactions reduce a future payout but the original processing fee is usually not refunded
• Reserve holdbacks — Some processors hold a percentage of revenue in reserve for new or high-risk accounts

Handling Refunds

When you refund a customer, the payment processor typically reverses the transaction but does not refund the original processing fee. The accounting entries are:

Refund issued:

Debit:  Revenue                     £120.00
Credit: Stripe clearing account     £120.00

Processor deducts from next payout:

Debit:  Stripe clearing account     £120.00
Credit: Bank                        £120.00

The £2.00 fee from the original transaction remains as an expense. Some processors (e.g. Stripe) now refund the fee on full refunds — check your processor’s current policy.

Accounting Software Integration

Most cloud accounting platforms offer direct integrations with payment processors:

These integrations pull transaction data directly into your accounting software, separating the gross sale, the fee, and the net deposit automatically. This significantly reduces manual reconciliation work.

Recording Monthly or Annual Fees

Some processors charge fixed fees in addition to per-transaction fees:

These should be recorded as separate expenses from the per-transaction processing fees to maintain clarity in your invoicing and expense reporting.