Alexandra Abela

Accounts Manager, E&S Group

Accounting considerations for Online Payments

Sunday 21st June 2020

The obligatory closure of the majority of the shops in Malta due to the novel coronavirus meant that small businesses had to instantly decide whether to accept payments in an online setting in order to continue operating or to completely shut down operations.  Businesses, commonly referred to as ‘merchants’, that were used to operate mainly on a cash basis might have not taken the time to truly understand the implications and the accounting considerations of accepting online payments.

Transactions Costs

The most obvious implication is the transaction costs. These are charged per transaction and the charge normally consists of a percentage varying between 0.5% and 5% plus a fixed cost.  Depending on the fee structure, the merchant would be able to see the cost that will be paid to the network company (like Visa and Mastercard) which is called the Interchange Fee.

Transaction fees are to be considered as an expense of the company. There are 2 schools of thought in relation to whether to classify them as part of the cost of goods sold given that the cost is directly related to the sale or as an administrative expense. Whilst both are considered acceptable, one should use the method that best reflects the business model.  

Settlement and Cut offs

Unlike what happens in a cash transaction, in the case of an online payment, funds are not instantly transferred to the business, but need to undergo a process.

The payment settlement is the process through which a merchant receives money paid by its customers. The bank then transfers the funds either when a merchant reaches a pre-set threshold, or else is done on a periodic basis, such as daily or weekly, with a predetermined delay. If we take a daily settlement with 7 days delay, the funds for transactions that happened on a Monday will be released the following Monday.

Settlement cycles are not always daily and are not always based on a midnight to midnight period, which causes cut off issues for accounting purposes especially at financial year end.

In which year should a transaction authorised on the last day of the financial year end be recognised as revenue? In determining such, one would simply need to evaluate as to when the merchant transferred the risks and rewards of ownership, given that in the case of an online payment the criteria for revenue recognition as per accounting standards are considered to be satisfied

Rolling Reserves

Settlement delays will affect cashflows timings, however cashflows are significantly impacted by rolling reserves. A rolling reserve is a cash reserve withheld from the merchant’s gross sales processed for a predetermined amount of time. Rolling reserve is usually a percentage of between 5% - 10% and is held for anywhere between a few weeks to 180 days depending on the agreement with the acquirer.  This is done as a risk mitigation for the acquirer in relation to chargebacks.

A rolling reserve held is to be considered as an amount receivable and the sales amounts are to be recognised as income in full. If the merchant statement clearly specifies the rolling reserve separately, then this should ideally be classified in a separate corresponding receivable account. 


Sometimes things go wrong, and customers are not satisfied and no matter how much you try to fix things for them they decide to go to their bank to issue a chargeback. A chargeback is issued when a cardholder disputes a transaction charged on their card. The amount is withdrawn immediately from the merchant account in addition to a chargeback fee. The merchant has a few days to submit proof of purchase and proof of delivery in order to reclaim the amount charged back.

If the merchant is planning to submit proof, then the amount withheld is to be considered as funds that the merchant is expected to recover and therefore designated accounts should be created. If such chargeback is won, one would clear the chargeback by debiting the bank and crediting the Accounts Receivable. If the chargeback is lost or the merchant decides not to fight the chargeback this should be written off.

Whilst these factors are common for all businesses that accept online payments, smaller businesses should make sure to acquaint themselves with the process cycle since its effect on cash flow can be significant, and therefore liquidity measures must be designed in line with the terms of their merchant contract.