For many small business owners, bookkeeping can feel like a daunting task. One of the biggest challenges is knowing how to categorize transactions that appear in your bank feed. When you download transactions directly from your bank, it may seem overwhelming to match them up with what’s in your books—especially when dealing with Accounts Receivable (A/R) and Accounts Payable (A/P).
This post will walk you through some simple tips to help you stay on top of categorizing those transactions. We’ll break it down into two parts: matching your A/R (the money your customers owe you) and your A/P (the money you owe your suppliers).
Categorizing Accounts Receivable (A/R) Transactions
When you receive payments from customers, the deposit will show up in your bank feed. But to ensure that your records are accurate, you’ll want to match that deposit to the correct A/R entry in your bookkeeping system. Here’s how to approach it:
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Match Payments to Invoices:
If you’re using invoicing software, you’ll likely have an outstanding list of unpaid invoices for each customer. When you receive a payment, whether by bank transfer, check, or credit card, find the corresponding invoice that the payment applies to.-
Look at the exact amount of the deposit in your bank feed.
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Go to your A/R and locate any open invoices for the customer.
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Match the amount in your bank feed to the correct invoice in your system.
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Tip: Many accounting software tools allow you to automatically match payments with invoices, but it’s always a good idea to double-check that the amounts and customers match.
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Partial Payments:
If a customer hasn’t paid the full invoice, match the partial payment to the open invoice and leave the remaining balance unpaid in your A/R. This will keep your records accurate and show what’s still owed. -
Deposits for Multiple Invoices:
Sometimes, customers pay multiple invoices with a single payment. If this happens, you’ll need to break down the deposit and apply it across the different outstanding invoices. -
Handling Overpayments or Customer Credits:
If a customer pays more than the invoice amount, you’ll want to record this as a credit in your bookkeeping system. The next time the customer owes you, you can apply the credit toward their payment.
Categorizing Accounts Payable (A/P) Transactions
On the flip side, your A/P reflects the money you owe to suppliers and vendors. These payments will also show up in your bank feed when you settle your bills. Here’s how you can categorize those transactions correctly:
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Match Payments to Vendor Bills:
Just like with A/R, matching A/P involves finding the corresponding bill in your records for the payment made to a vendor.-
Start by checking your bank feed for the payment amount.
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Locate the bill in your bookkeeping system that matches the vendor and payment amount.
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Record the payment against the open bill, reducing the balance of what you owe.
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Partial Payments:
If you’re making a partial payment toward a bill, record the payment and leave the remaining balance as open in your A/P. This ensures that your books reflect the accurate amount you still owe. -
Handling Vendor Prepayments:
In some cases, you may prepay for services or products. If this happens, record the payment as a prepayment or credit. When you later receive the invoice, apply the prepayment to settle the bill. -
Multiple Bills from One Vendor:
Often, you’ll make one payment to cover multiple bills. Be sure to match the total payment amount with each bill, reducing the amount owed accordingly.
By following these steps, you’ll be able to ensure that your books are organized and accurate, making tax season and financial planning much easier. As part of our “Simplifying Your Bookkeeping” series, these tips are designed to take the stress out of managing your finances.
Stay tuned for more practical advice in our upcoming posts!