Your small business collects cash from the bank or company that issues the credit card in exchange for a fee, while the customer is responsible for paying the card issuer later. How you record a journal entry for credit card sales depends on whether you receive immediate payment from the card issuer. Although you may be familiar with recording cash or check sales, credit card sales come with merchant fees. These credit card merchant fees require you to take additional steps when creating journal entries.
To find out, subtract the credit card merchant fees from the total sale amount. This represents how much money your business actually made from the sale. Credit card sales are when customers pay for a product or service with a credit card. Payments to your business come from the customer’s credit card company, not the customer directly. Read on to learn the ins and outs of accounting for credit card merchant fees and sales.
For example, many gas stations and department stores provide customers with credit cards that can be used to buy goods or services only at the issuer’s place of business. When a customer makes a purchase, the company must debit the customer’s account and credit the sales account. There are also some major credit cards that are not issued by banks, and receipts from these cards must be sent to the credit card company for reimbursement rather than deposited at a bank. After submitting credit card receipts totaling $1,000 directly to a credit card company, the company that makes the sale records the entry by debiting accounts receivable and crediting sales. Recording credit card expenses after receiving payment, as in the example above, is convenient because a compound journal entry is all that is needed.
A little bit about credit card processing fees
Unreal Corp. has a total of 5,00,000 as credit card sales on 10th January which is directly credited to the company’s account. Commission rate charged by the issuer bank is 2% on total sales. This article describes an optional approach to tracking credit card purchases and payments by making journal entries and using liability accounts to track credit card balances. 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 seller needs to submit all receipts of credit card sales as prescribed by the payer bank.
- Your card issuer sends you the amount of the sale minus the credit card fee, which again is $12.50 ($500 X 2.5%).
- Commission rate charged by the issuer bank is 2% on total sales.
- When the amount is due it is shown as accounts receivable in the books of the business.
- When you do, you must make a compound journal entry (i.e., there’s more than one debit, credit, or both).
The matching principle requires that expenses be recognized during the same accounting period as the revenues they help to generate. Digitization and modernization have made credit cards a very common mode of payment. Credit cards allow customers to shop without cash and make swift hassle-free payments. Frequent credit card payments mean businesses have to deal with the aspect of accounting and posting journal entry for credit card sales. 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.
Delayed Payment
This fee is deducted when the receipts are deposited in the company’s bank account, so these credit card receipts are slightly more complicated to record than other types of cash deposits. If a company deposits credit card receipts totaling $1,000 and the fee is 3%, the company makes a compound entry that debits cash for $970, debits credit card expense for $30 (3% of $1,000), and credits sales for $1,000. Some credit card receipts must be treated as receivables rather than cash.
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. Get up and running with free payroll setup, and enjoy free expert support. The GL should be reconciled to the VISA statement at the end of the month.
- Again, let’s say you make a $500 sale to a customer paying with a credit card.
- Credit card sales are when customers pay for a product or service with a credit card.
- The company receives cash for these credit card sales immediately.
- Wouldn’t it be nice if we could allow customers to pay on credit and not have to worry if they pay us or not?
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. Average fees for MasterCard, Visa, Discover, and American Express tend to range from 1.43% – 3.5%. Get the latest accounting news delivered straight to your inbox.
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The journal entry for the above transaction will be recorded in two sections, i.e., first, the entry for the sale will be recorded following the entry of the merchandise inventory sold. Your Cash and Accounts Receivable accounts are assets, which means they’re increased by debits and decreased by credits. Credit Card Expense accounts are expense accounts, so they are also increased by debits and decreased by credits. But, fees might also be a flat rate per transaction or a combination of a percentage and flat rate. Requires a company to estimate bad debts expense related to the sales recorded in that period.
Make a Journal Entry when you receive your credit card statement (example below), or make individual entries each time you make a purchase with your credit card. If you make individual entries the finance charge will be entered at the time you make a payment. In most cases, you receive funds from a credit card purchase immediately. When you do, you must make a compound journal entry (i.e., there’s more than one debit, credit, or both). Because of laws and disgruntled customers, you must be prepared to cover credit card merchant fees.
In some cases, you might be able to pass along swipe fees to customers. But, some state laws prohibit businesses from passing along these fees. Not to mention, some customers might be turned off from having to pay the fees. Again, this method depends on the arrangement you have with the bank and other credit card servicing vendors. When the amount is due it is shown as accounts receivable in the books of the business. Remember that the sum of your debits to the Cash and Credit Card Expense accounts must equal the amount you credit your Sales account.
If you do, that’s great news for the 80% of consumers who prefer playing with plastic. But, it comes with additional business responsibilities, such as recording credit card sales in your books. When you pay or receive credit card processing fees, do not record them as part of your sales revenue. Instead, credit card accounting principles require that you list them as expenses. 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. Unreal Corp. has 5,00,000 as credit card sales on 10th of January which is due to be settled on the 30th of January.
Accounting for Credit Card Sale when Money is Received Immediately
This balance is from one 6% note dated December 1, with a period of 45 days. Prepare any necessary journal entries for December 31 and for the note’s maturity date assuming it is honored. A perpetual inventory system is the type of inventory recording system used in production-based organizations where the sale and purchase of merchandise inventory are recorded using computerized systems. Basically, this journal entry is a reversal of your first journal entry to empty your Accounts Receivable account of the previously recorded amount and add to your Cash account.
Again, let’s say you make a $500 sale to a customer paying with a credit card. For the first journal entry, don’t worry about the credit card fee. Make two separate journal entries for credit card purchases with delayed payment. On June 5 of that next period, the company unexpectedly received a $900 payment on a customer account, Oakley Company, that had previously been written off in part a. Prepare the entries necessary to reinstate the account and to record the cash received.
In this article we’ll explore the optional method of using liability accounts, however, there are several advantages to using the Contra Asset Approach. 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. Wouldn’t it be nice if we could allow customers to pay on credit and not have to worry if they pay us or not? Then, after the payment arrives, cash is debited for $970 and accounts receivable is credited for $970. Let’s say you make a $500 sale to a customer paying with a credit card.
Accounting for Credit Card Sales
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. In case if the company’s bank account is not linked to the payer bank (issuer of swipe machine) then the business receives cash at a later date. The seller needs to submit all receipts of credit card sales as prescribed by the payer bank. Money is credited to the company’s account after deducting the commission on credit card sale. A credit card sale occurs when a customer pays for your small business’s products or services with a credit card instead of cash.
On August 2, Jun Co. receives a $6,000, 90-day, 12% note from customer Ryan Albany as payment on his $6,000 account. Accounts receivable account is credited when money is received on a later date. If you do not immediately receive payment, accrual accounting still requires you to record payment when the transaction takes place. Daw Company’s December 31 year-end unadjusted trial balance shows a $10,000 balance in Notes Receivable.
