01 — Concept
What is a Payment Gateway and Why Does It Create Accounting Complexity?
A payment gateway (Razorpay, PayU, Stripe, Paytm, CCAvenue) is a technology service that securely captures a customer's payment and transfers it to a merchant's bank account after deducting its fee. Unlike a cash sale — where money lands in your hand instantly — a gateway sale creates a time gap and a deduction gap: revenue is earned when the customer pays, but a net settlement (after deducting MDR and GST on MDR) arrives 1–3 working days later. This creates two separate accounting events that must both be correctly recorded.
2
Separate journal entries — at sale and at settlement
0–4%
MDR range — UPI (0%) to EMI / BNPL (up to 4%)
T+1
to T+3 typical settlement cycle for direct gateways
18%
GST on MDR — claimable as ITC by the merchant
📌 The Core Principle — Gross Method: Always record the full invoice value (including GST) as the gateway receivable at time of sale. Then, at settlement, record the MDR separately as an expense and the GST on MDR as ITC. Never net off revenue against gateway charges. This is the Gross Method, required under Ind AS 115 for accurate revenue reporting, GSTR-1 compliance, and ITC optimisation.
✅ Why Two Entries? Revenue is recognised when control of goods or services passes to the customer (Ind AS 115 / AS 9 — Accrual Basis) — not when cash hits your bank. The moment a customer's payment is authorised by the gateway, revenue is earned. The net bank settlement that arrives 1–3 days later is a separate event that clears the Gateway Receivable and records the MDR expense.
02 — Payment Gateway Money Flow
Payment Gateway Money Flow — 5 Stages
Understanding the journey of money through a payment gateway is the foundation of correct accounting. From the moment a customer clicks "Pay" to the moment funds land in your bank, there are distinct stages — each creating an accounting obligation.
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STAGE 01
Payment Authorised
Customer pays via UPI / Card / Net Banking / Wallet. Gateway captures and authorises the payment. Revenue is recognised HERE — raise Gateway Receivable A/c.
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STAGE 02
Gateway Holds Funds
Gateway holds full invoice amount in its settlement pool. Your books show a Gateway Receivable (current asset). No cash movement yet.
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STAGE 03
MDR Deducted
Gateway deducts its MDR fee (0% for UPI, 1.5–2.5% for cards, 2.5–4% for EMI). GST @18% on MDR is also deducted. You receive an invoice from the gateway for these charges — ITC is claimable.
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STAGE 04
Net Settlement
Net amount (Invoice value − MDR − GST on MDR) credited to your bank account (T+1 to T+3). This clears the Gateway Receivable and records MDR as an expense.
STAGE 05
GST Filing
Report full taxable sales in GSTR-1. Claim ITC on MDR in GSTR-3B. Pay net GST output after ITC. Reconcile gateway settlement report vs books.
03 — Case Study: Basic Sale via Razorpay
Case Study 1: Online Sale via Razorpay (Credit Card)
This is the most common scenario for direct website sellers — a customer pays via credit card through Razorpay. Razorpay deducts its MDR (plus GST on MDR) and remits the net to your bank within 1–2 working days.
FACTS OF THE CASE
Zerolev Tech Store — Razorpay Credit Card Sale
Customer purchases a ₹10,000 laptop bag. GST @18% = ₹1,800. Customer pays ₹11,800 via credit card through Razorpay. Razorpay MDR = 2% on ₹11,800 = ₹236 (MDR base ₹200 + GST on MDR @18% = ₹36). Razorpay issues a tax invoice for ₹200 + ₹36 GST. Net settlement to bank = ₹11,564 (after T+2 days).
Entry 1A: At Time of Sale — Record Revenue & Gateway ReceivableRevenue Recognition (Ind AS 115 / AS 9)
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Payment Gateway Receivable A/c (Razorpay) | Dr | 11,800 | — |
| To Sales / Revenue A/c | Cr | — | 10,000 |
| To GST Payable A/c (IGST / CGST+SGST) | Cr | — | 1,800 |
| Total | 11,800 | 11,800 | |
Being sale of laptop bag recorded on date of payment authorisation by Razorpay. Full invoice value (₹11,800 = ₹10,000 + ₹1,800 GST) debited to Payment Gateway Receivable A/c (a current asset). Revenue ₹10,000 and GST liability ₹1,800 are recognised at this point. Revenue is not deferred — control passes to buyer on payment confirmation.
Entry 1B: On Receipt of Net Settlement from Razorpay (T+2 Days)Bank Settlement — Gross Method
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c | Dr | 11,564 | — |
| Gateway MDR Expense A/c (Commission) | Dr | 200 | — |
| Input Tax Credit A/c (GST on Razorpay MDR) | Dr | 36 | — |
| To Payment Gateway Receivable A/c (Razorpay) | Cr | — | 11,800 |
| Total | 11,800 | 11,800 | |
Being Razorpay settlement received. ₹11,564 credited to Bank. MDR ₹200 debited as operating expense. GST on MDR ₹36 is Input Tax Credit — claimable in GSTR-3B against output GST liability. Payment Gateway Receivable A/c = ₹0 (fully cleared). Always retain Razorpay's tax invoice for ITC claim.
🔑 Key Rule — Always Report Gross in GSTR-1: Even though you receive a net settlement of ₹11,564, your GSTR-1 must report the gross taxable value of ₹10,000 and GST of ₹1,800. Never report ₹9,800 (net of MDR) as revenue — this understates turnover, violates GST filing rules, and prevents accurate ITC tracking. The MDR ₹200 is an expense in your P&L, not a reduction in revenue.
04 — Accounting by Payment Mode
Journal Entries by Payment Mode — UPI, Card, Net Banking, Wallet
Different payment modes carry different MDR rates and settlement timelines. The journal entry structure remains the same — but the MDR expense and ITC amounts vary. Here are the entries for each major payment mode.
01
UPI PAYMENT
Zero MDR — Simplest Entry
UPI transactions carry 0% MDR (per RBI mandate for small merchants). Entry 1B becomes: Dr Bank A/c | Cr Gateway Receivable A/c. No MDR expense, no ITC. Full invoice amount received in bank. Settlement: T+1.
02
CREDIT / DEBIT CARD
Standard MDR (1.5–2.5%)
MDR typically 1.5–2.5% + 18% GST on MDR. Entry as per Case Study 1 above. ITC claimable on GST portion of MDR — requires Razorpay/PayU tax invoice. Settlement: T+1 to T+2.
03
NET BANKING
Fixed Fee per Transaction
Net banking MDR is typically a flat fee (₹5–₹15 per transaction) + 18% GST. Entry: same structure as card MDR. For high-value B2B net banking payments, MDR may be negotiated lower. Settlement: T+1.
04
WALLET (PAYTM / PHONEPE)
Wallet-to-Merchant MDR
Wallet payouts to merchant bank carry MDR (typically 1–1.8%) + 18% GST. Same Gross Method entry applies. Maintain wallet-specific Gateway Receivable sub-ledger for easy reconciliation. Settlement: T+1 to T+2.
FACTS OF THE CASE
Zerolev Boutique — UPI Payment via Razorpay
Customer buys a ₹3,000 kurta online. GST @5% = ₹150. Customer pays ₹3,150 via UPI through Razorpay. UPI MDR = ₹0 (zero charge). Razorpay settles ₹3,150 in full to bank next day (T+1).
UPI Entry 2A: At Sale — Revenue RecognitionUPI — Zero MDR
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Payment Gateway Receivable A/c (Razorpay — UPI) | Dr | 3,150 | — |
| To Sales / Revenue A/c | Cr | — | 3,000 |
| To GST Payable A/c (IGST @5%) | Cr | — | 150 |
| Total | 3,150 | 3,150 | |
Being UPI sale — full invoice value ₹3,150 debited to Gateway Receivable. Revenue ₹3,000 and GST ₹150 @ 5% recognised.
UPI Entry 2B: On Settlement — Full Amount to Bank (No MDR)UPI Settlement — T+1
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c | Dr | 3,150 | — |
| To Payment Gateway Receivable A/c (Razorpay — UPI) | Cr | — | 3,150 |
| Total | 3,150 | 3,150 | |
UPI settlement: full ₹3,150 received in bank with no MDR deduction. Single debit to Bank, single credit to Gateway Receivable. Gateway Receivable = ₹0 (cleared).
05 — Case Study: EMI / BNPL Accounting
Case Study 3: EMI and BNPL Payment Gateway Accounting
EMI (Equated Monthly Instalments) and BNPL (Buy Now Pay Later) transactions attract higher gateway charges — typically 2.5–4% called EMI subvention or processing fee. Sellers often absorb this cost to offer no-cost EMI to customers, which requires a separate accounting treatment.
FACTS OF THE CASE
Zerolev Electronics — No-Cost EMI via Razorpay
Customer buys a ₹20,000 phone on 3-month no-cost EMI via Razorpay. GST @18% = ₹3,600. Customer pays ₹23,600 in three EMIs. Razorpay charges EMI subvention: 3% on ₹20,000 = ₹600 + GST @18% on ₹600 = ₹108. Total EMI cost = ₹708. Net settlement = ₹22,892.
EMI Entry 3A: At Sale — Record Full RevenueEMI Sale — Revenue at Point of Authorisation
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Payment Gateway Receivable A/c (Razorpay — EMI) | Dr | 23,600 | — |
| To Sales / Revenue A/c | Cr | — | 20,000 |
| To GST Payable A/c (IGST @18%) | Cr | — | 3,600 |
| Total | 23,600 | 23,600 | |
Being EMI sale — revenue recognised at point of payment authorisation (Razorpay pays you upfront; the bank collects EMI from the customer). Full ₹23,600 raised as Gateway Receivable. Revenue and GST recognised immediately.
EMI Entry 3B: On Settlement — Record EMI Subvention as Separate ExpenseEMI Subvention Expense — Gross Method
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c | Dr | 22,892 | — |
| EMI Subvention / Processing Expense A/c | Dr | 600 | — |
| Input Tax Credit A/c (GST on EMI Charge) | Dr | 108 | — |
| To Payment Gateway Receivable A/c (Razorpay — EMI) | Cr | — | 23,600 |
| Total | 23,600 | 23,600 | |
EMI subvention ₹600 is recorded as a separate expense — NOT netted against revenue. ITC ₹108 on the GST charged by Razorpay is claimable. Gateway Receivable = ₹0 (cleared). Use a distinct ledger "EMI Subvention Expense" for management reporting to track cost-of-no-cost-EMI offers separately from standard MDR.
⚠️ No-Cost EMI Disclosure: Under no-cost EMI schemes, the seller typically absorbs the EMI subvention cost. This is a valid business expense and deductible under income tax. However, if the seller is inflating the MRP to absorb EMI costs and then offering a "discount," GST must still be charged on the original transaction value (pre-discount) if the discount is not pre-agreed in the sale contract. Consult your CA for the correct GST treatment on no-cost EMI schemes.
06 — Case Study: Gateway Refund Accounting
Case Study 4: Refund via Payment Gateway
When a customer returns a product and a refund is processed via the same payment gateway, two entries are required: one to reverse the original sale and one to record the cash outflow. Note that some gateways (like Razorpay) charge a refund processing fee — this must be accounted for separately.
FACTS OF THE CASE
Zerolev Fashion — Customer Return Refund via Razorpay
Customer returns a ₹5,000 dress purchased online. GST @12% (₹600). Full refund of ₹5,600 initiated via Razorpay. Razorpay charges no refund processing fee (refund MDR waived in this case). Refund processed in 5–7 business days to customer's original payment method.
Refund Entry 4A: Customer Return — Reverse Revenue & GSTSales Return / Credit Note Entry
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Sales Returns & Allowances A/c | Dr | 5,000 | — |
| GST Payable A/c (Output Tax Reversal @12%) | Dr | 600 | — |
| To Customer Refund Payable A/c | Cr | — | 5,600 |
| Total | 5,600 | 5,600 | |
Return entry — Sales Returns A/c ₹5,000 reduces revenue. GST Payable ₹600 reduced (output tax reversal). Customer Refund Payable A/c created as a current liability until the gateway processes the refund. Issue a Credit Note in GSTR-1 to formally reverse the GST output.
Refund Entry 4B: Refund Processed via Razorpay — Cash OutflowRefund Payment — Gateway Reversal
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Customer Refund Payable A/c | Dr | 5,600 | — |
| To Bank A/c / Payment Gateway A/c | Cr | — | 5,600 |
| Total | 5,600 | 5,600 | |
Refund processed via Razorpay — Customer Refund Payable A/c cleared. Cash exits the bank. If Razorpay charges a refund processing fee (some gateways do), add: Dr Refund Processing Expense A/c | Dr ITC A/c | Cr Bank A/c (for the separate fee amount).
07 — Chargeback Accounting
Case Study 5: Chargeback / Disputed Transaction via Payment Gateway
A chargeback occurs when a customer disputes a transaction with their bank or card issuer. The payment gateway immediately reverses the funds from your settlement account — even before the dispute is resolved. This creates a "Chargeback Receivable" (an asset if you plan to win) or must be written off as an expense (if the dispute is lost).
Chargeback Entry 5A: Gateway Reverses ₹11,800 from Your AccountChargeback Raised — Dispute Pending
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Chargeback Receivable A/c | Dr | 11,800 | — |
| To Bank A/c | Cr | — | 11,800 |
| Total | 11,800 | 11,800 | |
Gateway reverses the full ₹11,800 from your bank. Chargeback Receivable A/c is a current asset — you are claiming the right to recover these funds. Submit chargeback dispute with order proof, delivery confirmation, and communication evidence to the gateway.
Entry 5B(i): Chargeback WON — Gateway Credits ₹11,800 BackDispute Won — Full Recovery
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c | Dr | 11,800 | — |
| To Chargeback Receivable A/c | Cr | — | 11,800 |
| Total | 11,800 | 11,800 | |
Dispute won — gateway credits full ₹11,800 back to bank. Chargeback Receivable A/c cleared. The original sale entry (Entry 1A) stands — revenue and GST are unaffected.
Entry 5B(ii): Chargeback LOST — Write Off as Chargeback LossDispute Lost — Expense & GST Reversal
| Account | Dr/Cr | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Chargeback Loss / Bad Debt Expense A/c | Dr | 10,000 | — |
| GST Payable A/c (Reverse Output Tax @18%) | Dr | 1,800 | — |
| To Chargeback Receivable A/c | Cr | — | 11,800 |
| Total | 11,800 | 11,800 | |
Chargeback lost — ₹10,000 written off as Chargeback Loss (P&L expense). GST output ₹1,800 reversed since this sale is effectively void. Issue a Credit Note in GSTR-1 to reverse GST. Chargeback Receivable A/c = ₹0. Consult CA on eligibility of GST reversal on chargeback losses before filing.
08 — Month-End Payment Gateway Reconciliation
Month-End Payment Gateway Reconciliation Framework
Every month, before GST filing, perform these four reconciliations to ensure your books, gateway reports, and GST returns are perfectly aligned. A single unreconciled line item can cause GSTR-1 mismatches or ITC disallowance.
R1
BANK RECON
Bank vs Gateway Settlement Report
Match every bank credit (gateway settlement) against the corresponding line in the gateway's settlement report (downloadable from Razorpay / PayU dashboard). Identify timing differences — settlements that crossed month-end. Flag unexplained debits (chargeback reversals, gateway adjustments).
R2
REVENUE RECON
Books vs Gateway Transaction Report
Total gross sales in your books must equal total transactions in the gateway's transaction report. Any variance = either unrecorded orders or double entries. Reconcile daily if possible — monthly at minimum. Gross revenue in GSTR-1 must match your books.
R3
MDR RECON
MDR Expense vs Gateway Fee Statement
MDR expense per books must match the fee charged per the gateway's monthly statement / tax invoice. This also validates ITC claimed on MDR GST. If the gateway has issued separate tax invoices for MDR — each must match a specific settlement.
R4
GST RECON
GSTR-1 vs Order / Transaction Data
GST output declared in GSTR-1 = GST on all confirmed orders for the month. Refunds (credit notes) reduce output. ITC on MDR must be captured in GSTR-3B. Verify IGST vs CGST+SGST split by customer shipping state or PIN code.
Summary — All Payment Gateway Journal Entries
Quick Reference — All Payment Gateway Journal Entries
| Transaction | Debit | Credit | Key Note |
|---|---|---|---|
| Sale via gateway (any mode) | Payment Gateway Receivable A/c | Sales A/c + GST Payable A/c | Full invoice value as Dr — Gross Method |
| Gateway settlement — card/wallet (with MDR) | Bank A/c + MDR Expense A/c + ITC A/c | Gateway Receivable A/c | MDR = expense; ITC on GST portion of MDR is claimable |
| Gateway settlement — UPI (zero MDR) | Bank A/c | Gateway Receivable A/c | Full amount received; no MDR entry |
| EMI / BNPL settlement | Bank A/c + EMI Subvention Expense A/c + ITC A/c | Gateway Receivable A/c | Use separate "EMI Subvention Expense" ledger |
| Customer return / refund initiated | Sales Returns A/c + GST Payable A/c | Customer Refund Payable A/c | Issue Credit Note in GSTR-1 |
| Refund paid via gateway | Customer Refund Payable A/c | Bank A/c | Clears refund liability |
| Refund processing fee (if charged) | Refund Fee Expense A/c + ITC A/c | Bank A/c | Some gateways charge a fee for processing refunds |
| Chargeback raised by customer | Chargeback Receivable A/c | Bank A/c | Dispute pending — current asset |
| Chargeback won | Bank A/c | Chargeback Receivable A/c | Original sale entries stand |
| Chargeback lost | Chargeback Loss A/c + GST Payable A/c | Chargeback Receivable A/c | Reverse GST output; issue Credit Note in GSTR-1 |
| Multi-gateway — consolidation entry | Combined Bank A/c + MDR Expenses | All Gateway Receivable sub-ledgers | Maintain separate sub-ledger per gateway for reconciliation |
09 — Interactive Classroom
Accounts School — Payment Gateway Journal Entries Interactive Classroom
Step into the virtual accounting classroom. Navigate through 6 animated lessons covering payment gateway accounting — from the basic sale entry to EMI, refunds, chargebacks, and reconciliation — with live quizzes, teacher narration, and interactive notes.
💳
Accounts School
PAYMENT GATEWAY ACCOUNTING · ZEROLEV
Step into a virtual classroom! Learn payment gateway journal entries, MDR accounting, GST on gateway sales, refunds, chargebacks, and reconciliation with an animated teacher, interactive blackboard, live quizzes, and voice narration.
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Accounts School
PAYMENT GATEWAY ACCOUNTING
Beginner – Intermediate
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10 — FAQ
Frequently Asked Questions
What is the journal entry for a sale made via Razorpay or PayU?
There are two entries. At time of sale: Dr Payment Gateway Receivable A/c (full invoice value including GST) | Cr Sales A/c (net of GST) | Cr GST Payable A/c (GST amount). At settlement (1–3 days later): Dr Bank A/c (net received) | Dr Gateway MDR Expense A/c (gateway fee) | Dr ITC A/c (GST on gateway fee) | Cr Payment Gateway Receivable A/c (full amount). This Gross Method is preferred under Ind AS 115 for accurate revenue reporting and ITC optimisation.
What is MDR and how is it accounted for?
MDR (Merchant Discount Rate) is the fee charged by a payment gateway for processing each transaction. For Razorpay: UPI = 0%, domestic cards = ~1.9–2%, international cards = 3%+. For PayU and other gateways, MDR varies by agreement. MDR is recorded as an operating expense (Gateway Charges / Commission Expense A/c) in your P&L. The GST charged on MDR (18%) is Input Tax Credit — claimable in GSTR-3B, provided you have the gateway's tax invoice. Never reduce your sales revenue by the MDR amount — always use the Gross Method.
Does UPI payment via gateway need a journal entry at settlement?
Yes, but it's simpler. For UPI, the settlement entry is just: Dr Bank A/c | Cr Payment Gateway Receivable A/c. No MDR expense entry is needed since UPI carries 0% MDR. However, you still need the initial sale entry (Dr Gateway Receivable | Cr Sales | Cr GST Payable) at time of payment. Even for UPI, maintain a separate Gateway Receivable sub-ledger for each gateway to simplify monthly reconciliation.
How do I account for GST on payment gateway sales in India?
GST on the sale follows the same rules as any other sale. The place of supply determines CGST+SGST (intra-state) or IGST (inter-state). For most online sales, buyer state ≠ seller state → IGST applies. Journal entry: Dr Gateway Receivable | Cr Sales A/c | Cr IGST Payable A/c. Separately, the GST charged by the gateway on its MDR fee (a B2B service) is ITC for you — record as Dr ITC A/c and claim in GSTR-3B. Declare sales in GSTR-1 at gross taxable value — never net of MDR.
Should I maintain separate ledger accounts for each payment gateway?
Yes — maintaining separate Payment Gateway Receivable sub-ledgers for each gateway (Razorpay Receivable, PayU Receivable, Stripe Receivable, Paytm Receivable) is best practice. This makes month-end reconciliation fast and accurate: you match each gateway's settlement statement against its own dedicated ledger. In Tally Prime, create sub-ledgers under a parent group "Payment Gateway Receivables" (Current Assets group). In Zoho Books or QuickBooks, create separate "Other Current Asset" accounts per gateway. A combined single-ledger approach makes chargeback tracking and MDR reconciliation extremely cumbersome.
What happens if gateway settles across different GST periods?
Revenue recognition follows the date of sale (when payment is authorised), not the date of settlement. If a sale occurs on March 31 but the gateway settles on April 2, the revenue and GST output belong to the March GST period (to be reported in March's GSTR-1). The bank entry (settlement) is an April entry but references a Gateway Receivable created in March. This cross-period settlement is normal — the Gateway Receivable A/c acts as a bridge. Ensure your closing balance of Gateway Receivable = all unsettled transactions as at month-end.
How do I handle a chargeback in accounting if the dispute is still pending?
While a chargeback is pending (dispute filed, awaiting outcome), keep the Chargeback Receivable A/c as a current asset on your balance sheet. Do not write it off as an expense until the dispute outcome is final. If the gateway has already debited your bank (which they typically do immediately on chargeback), the entry is: Dr Chargeback Receivable | Cr Bank. If you win → Dr Bank | Cr Chargeback Receivable (recovery). If you lose → Dr Chargeback Loss A/c + Dr GST Payable | Cr Chargeback Receivable (write-off with GST reversal).