If your merchants are having funds set aside in a risk reserve, it’s important for them to track exactly what’s in that account.
Sloppy accounting gets the better of many merchants because here’s what they do when they book a merchant deposit for $100 sale and a 10% risk reserve is involved:
Revenue $90
Bank Account $90
Hey, wait a minute, where did that $10 go? It didn’t disappear into thin air, and it certainly shouldn’t be considered a cost of doing business. It’s sitting in the service provider’s reserve account on the merchant’s behalf. That means it’s an asset that should be sitting on the merchant’s balance sheet.
Instead, the deposit entry should look like this when there’s a reserve involved:
Revenue $100
Bank Account $90
Reserve Receivable $10
As the merchant services provider adds funds to the reserve on the merchant’s behalf, that amount will climb on the merchant’s balance sheet, and they’ll know exactly what is owed to them in the event they stop processing. When should the merchant expect to get it back? That’s a complicated answer that depends on the unique circumstances of each merchant. In general, the funds should be released as soon as the threat of any financial loss to the provider has passed.
There are a lot of merchants who look at a reserve as an expense– a cost of doing business. And unless they’re planning on burning their merchant services provider by running up a big tab of uncollected chargebacks and high fees and then running, that’s a flawed approach.
Help your merchants properly account for their deposits, and you’ll help them hang onto the funds that are rightfully theirs.
