• Differentiate between three methods of recording sales by credit card
• Demonstrate recording purchases by credit card

 

Record Sales by Credit Card

A company’s accounting procedures for recording credit card sales will depend on how the credit card or charge card transaction is being posted to the bank (which depends on how you set up your service) and how the company then decides to make the entry. There are three possibilities.

Net Method

Assume NeatNiks accepted a credit card on December 14 for a $1,000 cleaning job and the service charge is three percent of sales. The $970 deposit shows up in the bank the next day. The entry to record this deposit is:

JournalPage 101

Date	Description	Post. Ref.	Debit	Credit
20–
Dec 15	Checking account		970.00
Dec 15	Bank Fees		30.00
Dec 15	Service Revenue			1,000.00
Dec 15	To record credit card deposit

Gross Method

Assume NeatNiks accepted a charge card on December 14 for a $1,000 cleaning job and the service charge is three percent of sales. The $100 deposit shows up in the bank the next day, and in January, during the bank reconciliation process, Nick discovers a $30 charge from VISA for the service fee. The entry to record the deposit is:

JournalPage 101

Date	Description	Post. Ref.	Debit	Credit
20–
Dec 15	Checking account		1,000.00
Dec 15	Service Revenue			1,000.00
Dec 15	To record credit card deposit

In January, Nick will backdate the service charge to have it show up in December (following the matching principle):

JournalPage 101

Date	Description	Post. Ref.	Debit	Credit
20–
Dec 31	Bank Fees		30.00
Dec 31	Checking Account			30.00
Dec 31	To record credit card fees for Dec.

You may find your credit card service provider charges both a per-transaction fee you could record using the net method and a monthly fee you would record using the gross method. In addition, in our example, we posted the card fee to our already existing Bank Fees account, but if we wanted to keep track of charge card fees separately in order to see how much we are spending monthly, quarterly, or annually on bank card fees, we could set up a separate account to track them.

Accounts Receivable Method

Again, this method depends on the arrangement you have with the bank and other credit card servicing vendors.

The entry would look like this at the time the sale was made:

JournalPage 101

Date	Description	Post. Ref.	Debit	Credit
20–
Dec 15	Accounts Receivable		1,000.00
Dec 15	Service Revenue			1,000.00
Dec 15	To record charge card sales

This method would be appropriate if you had to bill the credit card or charge card company periodically. When you receive the payment in January, you would make the following entry:

JournalPage 101

Date	Description	Post. Ref.	Debit	Credit
20–
Dec 15	Checking account		970.00
Dec 15	Bank Fees		30.00
Dec 15	Accounts Receivable			1,000.00
Dec 15	To record receipt of charge card sales, net of fees

As an accountant, you have to figure out what entries make the most sense for each type of transaction using what you learn in this course.

Record Purchases by Credit Card

Many business-to-business (B2B) transactions are based on credit. For instance, if Home Depot needs 1,000 board feet of lumber from Boise Cascade, the purchasing agent creates a purchase order (PO) and sends it to the vendor (Boise Cascade, in this example). The vendor creates a sales order, sends it to the fulfillment department (probably the warehouse folks), and then someone in the warehouse fills the order, puts it on a truck, creates an invoice (bill), and a packing slip for the shipment, and ships it. Home Depot’s receiving department (loading dock folk) gets the shipment and matches it to the packing slip, puts the inventory on the floor, and sends the packing slip up to accounts payable (AP). The AP clerk makes sure the packing slip matches the invoice and then processes the whole thing (often called a voucher) for payment. The terms usually require Home Depot to pay within 30 days and there is often a discount for paying early, maybe up to two percent. We’ll talk more about this later when we discuss accounts payable.

For many purchases, such as supplies and travel, certain members of the company may have company credit cards. In that case, the purchases may not show up as transactions until the bookkeeper receives the credit card statement, which may be in the next accounting period. If the amounts are immaterial according to the company’s subjective assessment of that term, recording June expenses in July may be acceptable. However, the proper way to record the expenses would be to accrue them to the proper period.

Most computer applications allow you to create a credit card account and to enter transactions as they occur. Take these January transactions, for example:

First World Bank: NeatNiks

Statement 1/31/20XX
First World Bank VISA
Beginning balance			$427.89
Date	Description		Amount
1/20/20XX	Domino’s Pizza		$18.66
1/22/20XX	Target		$452.32
1/22/20XX	Walmart		$88.99
1/26/20XX	NAPA auto parts		$54.54
1/31/20XX	Finance charge		$12.49
Statement balance			$1,054.89
Available balance			$3,866.46

Each charge should be accounted for as it occurs and properly documented:

JournalPage 101

Date	Description	Post. Ref.	Debit	Credit
20–
Jan 20	Meals and Entertainment	576	18.66
Jan 20	First World Bank VISA Payable	210		18.66
Jan 20	To record staff meeting meal

When the credit card balance is paid, the entry would look like this:

JournalPage 101

Date	Description	Post. Ref.	Debit	Credit
20–
Feb 10	First World Bank VISA Payable	210	427.89
Feb 10	Checking Account	110		427.89
Feb 10	To record payment of balance due on VISA

And then the GL will look like this:

Date		Item	Post. Ref.	Debit	Credit	Balance
						Debit	Credit
Bal fwd							427.89
Jan	20		GJ101		18.66		446.55
Jan	22		GJ101		452.32		898.87
Jan	22		GJ101		88.99		987.86
Jan	26		GJ101		54.54		1,042.40
Jan	31		GJ101		12.49		1,054.89
Feb	10		GJ101	427.89			627.00

The GL should be reconciled to the VISA statement at the end of the month. In this case, you can see how the GL balance on January 31 of $1,054.89 matches the statement balance, so the reconciliation would be easy.

Credit cards, like petty cash, can be abused. Unlike petty cash, which is usually a fairly small amount of money, credit card charges can add up quickly and get out of control if not carefully monitored. In the next section, we’ll talk about internal controls on credit cards.