Basic Accounting – Understanding Credit Cards
Tracking Credit Card Entries for Small Business Bookkeeping
Nov 14, 2009
Tracking credit card entries seems pretty simple at first, especially if one is using an accounting program. However, unless the process of how credit card liabilities in bookkeeping is fully understood, it is easy to make mistakes, even with a program, such as QuickBooks or Simply Accounting.
How Credit Cards Relate to the Accounting Entries
The first thing to understand is that using a credit card is basically borrowing. Everyone knows this, but understanding how it works in bookkeeping is not as simple. When one purchases something for the business on a credit card, then one is borrowing against a loan and creates a liability to the credit company. This is similar to withdrawing from a bank account. Therefore, a separate account that tracks the liability is created. This not the same as an accounts payable! Accounts payable is the amounts that are owed to vendors. With a credit card, the vendor is already paid, and it is the credit company (loan) that is owed.
In basic accounting programs when a bookkeeper enters in the payments to a credit card, either a liability bill is entered, or a cheque is created, in order to clear the credit liability. This can be confusing! For example, in QuickBooks, the cheque is created for the full balance of the statement. Not every business owner pays the full balance every time. Therefore, the cheque has to be modified in another screen in order to reflect the correct amount that is paid against the credit card.
Never enter anything through the credit card screens or journal entry system to Accounts Payable! Not only will this end up being confusing, it will make it extremely difficult to track the actual amount that is owed to a particular credit card company.
The Basic Credit Cards Entries in Accounting Systems
So, the two basic sides of the entry when purchasing by credit card are:
- Debit to expenses and sales taxes (increases the expense and lowers tax liability)
- Credit to the credit card loan (increases the amount owed to the credit company)
When paying against a credit card, the two sides of the entry are:
- Debit to the credit card loan (decreases the amount owed to the credit company)
- Credit to the bank account that payment is coming from (decreases the amount in the bank account)
When there is interest charged on a credit card, then the entry is:
- Debit to interest expense (increases the expense amount for the period)
- Credit to the credit card loan (increases the amount owed to the credit company)
And that’s it! Bookkeeping for credit cards isn’t that difficult, once the concepts of the accounts are truly understood. Just remember that the biggest mistake is mixing up what is owed to the credit card company (the loan amount) and accounts payable (amounts owed to vendors). Never mix these up, keep the accounts straight, as shown in the entry examples above, and everything will be simple!
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