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Transfers Between Bank Accounts

Transfers between bank accounts often trip people up in QuickBooks.  Here are some of the errors we see:

  • Coding a transfer out of a bank account as an expense and coding the deposit into the receiving bank account as income.
  • Duplicate entry of the transfer – by posting the transfer separately in each of the two bank accounts affected.
  • Duplicate entry of the transfer – from manual entry and again by posting from the bank feed.

Then the entries made in an attempt to fix the above errors really turn everything into a mess.

In this post we’ll cover four common types of bank-to-bank transfers and how to enter them correctly in QuickBooks.

First, what is a bank transfer?

First let’s look at the substance of a bank transfer. Cash is withdrawn from one bank account and deposited into another bank account. Each real life bank account corresponds to a bank account in the chart of accounts in QuickBooks. Only two bank accounts, in real life and in QuickBooks, are involved in a bank transfer. The two bank accounts could be two cash accounts or a cash account and a liability account, such as a credit card or line or credit, or even two liability accounts.

That’s it! No income or expense accounts are impacted.

It may help at this point to read our post, Nonprofit Balance Sheet Framework. Next we will describe some common transfer scenarios.

Transfer from PayPal

PayPal is a bank account. Yup, that’s right. A lot of people record PayPal donations or other sales activity when they transfer the funds from PayPal into the operating bank account. That approach is not correct.

You should record PayPal donations or other sales and the related fees to a PayPal bank account in QuickBooks as the activity happens in PayPal. If money is transferred from PayPal, record that, too. The key point is each month you should record activity that affects the cash balance held at PayPal whether or not you transfer any money out of PayPal. The transfer from PayPal to the operating bank account is simply a transfer between two bank accounts, not new income.

To record a transfer from PayPal, in QuickBooks Online click on the Plus menu, then Transfer to open the Transfer window. Indicate the date the transfer was initiated at PayPal. The “Transfer Funds From” account is PayPal. The “Transfer Funds To” account is the bank account that received the funds. You can add a memo, but it’s usually not necessary. Save the transfer.

Assuming you have your operating bank account connected to a bank feed in QuickBooks Online, when the transfer downloads into QuickBooks you can Match the downloaded transaction to the transfer already entered in QuickBooks.

An alternative method is to add the transfer directly from the receiving bank account’s bank feed in QuickBooks Online. Click on the downloaded transaction line in the bank feed and click the radio button for Transfer. Indicate the PayPal bank account as the account (QuickBooks already knows it was a deposit into the operating account if you are working in the operating account bank feed. It just needs to know the other account affected.)

We feel there is less chance of getting confused if you enter the transfer manually, then allow QuickBooks to Match the downloaded transaction in the bank feed. However, if you are comfortable with the process you can certainly take a shortcut and post directly from the bank feed.

Be aware if you have PayPal linked to the bank feed in the Banking Center that the same transaction will also download on the PayPal side. If you’ve already added the transaction, you should see a prompt to match the transaction. Be careful you do not add the transaction twice. Adding the transaction the first time will impact both bank accounts.

Transfer between bank accounts – not by check

If you transfer money between two bank accounts using the online transfer option within the same bank or via wire transfer or some other method that does not use a physical check, then follow the same procedure as PayPal above.

Transfer between bank accounts – by check

If you transfer money from an account in one bank to an account in a completely different bank using a check, then record the transfer by entering the check that was written.

In this case you would enter the check written for the transfer like any other check. In the QuickBooks check entry window where you would normally indicate the expense account, select the bank account the money is going into. Recording the check will simultaneously record the withdrawal of cash from the bank account on which the check is drawn and the deposit of cash into the other bank account. You do not need to create an additional deposit in QuickBooks. If the check is written at month end, or if there is delay in depositing it into the other bank, it’s possible the check will be outstanding at month end.

It will help your bookkeeper if you can physically deposit a check for a transfer of funds separately from donations or other types of income. That way the transfer will show up as a separately stated amount on the bank statement where it’s deposited.

Transfer from a bank account to pay a credit card

Purchases on a credit card should increase a credit card liability account in QuickBooks. This is a perfect opportunity to connect your card in QuickBooks Online to the bank feed so you can automatically download credit card activity.

When it’s time to pay the card, you likely pay online. Again only two accounts are affected. This time it’s the bank account and the credit card liability account. If no check is involved, follow the same procedures as a PayPal transfer to record the transfer of funds. If a check is used to pay the card, follow the procedures for transferring funds using a check. Again no income or expense account is involved.

Transfers are deceptively simple transactions.

Transfers between bank accounts are deceptively simple transactions. Keep that thought in mind next time you have to record a transfer, whether it’s from PayPal or between two bank accounts or from a bank account to pay a credit card. You only want to affect two balance sheet accounts (usually two asset accounts or an asset and a liability account), and you only want to record the transaction one time in each account. “See” the transaction in your mind, then record it that way in QuickBooks.

If you do make a mistake, you will catch it in the bank reconciliation and you can delete any duplicate or erroneous transaction. Here’s a tip — if you have transfers between accounts, set up all your bank and credit card reconciliations first, then go back and finalize them. Sometimes you find errors in one bank account that affect another bank account. Once you’ve finalized a bank reconciliation, you can no longer match or add transactions from the bank feed from that period.

Remember transfers are simple transactions affecting only two balance sheet accounts and you will be fine!

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