Bookkeeping – Purchases Via Credit Cards (Lesson 42)

Lesson 42

It is more common in small business, especially small contractors, to buy materials using credit cards.  Often the credit card accounts are the owner’s personal accounts.  Sometimes the cards are merchant cards.  As the bookkeeper it is your job to keep this information organized and up to date.  This lesson explains the different types of credit cards and how to organize the chart of accounts.  I provide several internal control procedures to make your job easier and to prevent misappropriation of funds.  I will include how technology manages the data flow and how to keep up with the day-to-day purchases.

Types of Credit Cards

There are a multitude of different cards available on the market.  Most of the cards are third party lenders using Master Card or VISA as the brand.  Sometimes small businesses use merchant cards such as Lowe’s or Home Depot.  Even fuel cards are a function of the merchant system.

The best method of monitoring the card is to limit each card to their respective function.  In effect one card is for fuel, another is for materials or dedicated to goods for resale and so on.  Naturally the merchant cards are automatically restricted to their preset function.  But even in this case, sometimes it is a good idea to further restrict the card’s purpose.

As an example, for one client I restricted the Lowe’s card to job materials only.  Any tools purchased had to be bought using a particular VISA card.  This made it easier to control purchases for this contractor.

Organization of Ledgers

The key to bookkeeping success is proper organization and processes to verify and enter the data into the accounting system.  Credit cards are a current liability and thus located in that section of the chart of accounts.

Credit cards should be set up right after accounts payable in the line-up.  Good organization breaks the credit card accounts into two separate groups.  One group is for cards with a function towards production (cost of sales).  The second group of cards are focused on operational expenses.  Below is an appropriate model:

CURRENT LIABILITIES
.            Accounts Payable – Suppliers

.            Accounts Payable – Expenses
.           Credit Cards – Production
.           Credit Cards – Operations

Each credit card group is set as a parent-child format and the credit cards have their own respective sub-account.  I encourage including the last four digits of the account number in the account name as illustrated below:

CURRENT LIABILITIES
.           Accounts Payable – Suppliers

.           Accounts Payable – Subcontractors
.           Accounts Payable – Expenses
.           Credit Cards – Production (Parent Account)
.                VISA # 8011
.                VISA # 2935
.                Home Depot # 5117
.                Lowes # 5345
.          Credit Cards – Operations (Parent Account)
.                Fleet Fuel # 6942-1
.                Fleet Fuel # 6942-2
.                VISA # 3777
.               American Express # 0701
.           Accrued Payroll
.           Accrued Taxes
.           Line of Credit
.           Billings on Account
.           Contract Deposits

The above layout is actually for a residential remodeler.

Note the separation of each card as its own unique account.  It follows a similar pattern used in cash accounts.  Remember there is a separate account for each checking or petty cash physical location.  Why have a separate account for each credit card?

Simple answer:  there is an online ability to monitor activity each day in the account just like bank accounts.

Day-To-Day Activities

The most basic need in small business is also the one with the least amount of action – communication.  Each day several individuals within the business structure have and use credit cards.  For you, you need those receipts to properly record the particular transaction.

To complete this daily task, those with credit cards should turn in their receipts every day for processing.  As you receive the tickets match them up against the online report for that particular card.  Any online activity without a receipt should be addressed.  Hound the card users to turn in the receipts and keep up with the activity.  The following are some examples of credit card entries:

PURCHASES JOURNAL
Date       ID                             Ledger                 Description                                    DR                  CR
Today    201511194102      Fuel                     19.3 Gal’s Unit #2                       53.00

.              201511194102      CCO FF#6942-219.3 Gal’s Unit #2                                              53.00
.                                                                                                                                     53.00              53.00

Today    4791                        COS – Mts          Vanity Set/Sink – Hugan         293.42
.              4791                        CCP – HD#5117 Vanity Set/Sink – Hugan                               293.42
.                                                                                                                                   293.42            293.42

Today    4792                        FA-Equipment     Table Saw                                  577.41
.              4792                        FA-Equipment      Blade/Jig Kit                            406.31
.              4792                        CCO-VISA#3777 Table Saw/Jig Kit                                           983.72
.                                                                                                                                    983.72            983.72

As each receipt is turned in, record the information to the books and use a processing stamp to authorize the ticket.  The stamp process is explained in Processing the Documents.  The stamp basically requires approval by management, usually the owner, prior to entry into the books.  Once approved enter the ticket into the system using the purchases journal.  After entering all the prior day’s tickets/receipts and verbal communication; it is time to reconcile.

Reconciliation requires two sources of information.  With credit cards the primary source is the online statement.  There will be an ending balance of amount owed.  It is unusual or rare for the credit card company to be out of balance as all the entries are instantaneous.

The most common item or difference is something missing in the ledger for the respective credit card.  The ledger is the second source of information used in the reconciliation process.  Once all the entries tie to the credit card account statement and the ending balances match the account is reconciled.

To add interest fees for any balance after the payment deadline, use either the purchases or general journal to enter the information.  There should be an account in costs of capital section of the expense type of accounts named ‘Credit Card Fees and Interest’ to post any penalty fees and monthly interest charges.

Below is the layout on the income statement and a purchase journal entry for a credit card penalty and interest charge.

.                             INCOME STATEMENT
.                For the Month Ending November 30, 2015

Revenue                                                       $71,204
Cost of Sales                                                  37,196
Gross Profit                                                    34,008

Expenses                                                        23,942
Cost of Capital (Expanded Mode)
.           Depreciation                                      $3,401
.           Amortization                                          507
.           Interest and Fees:
.                       Interest-Notes                        $1,742
.                       Credit Card Fees                         215
.                       Total Interest and Fees             1,957
.           Sub-Total Capital Costs                       5,865
Profit                                                               $4,201

Note how the interest and fees are separated between long-term debt and short term liabilities.  Sometimes there is a third line for regular accounts payable fees or interest charges including the line of credit interest.  Let’s look at one of the interest and penalty fee entries posted to the general journal for a late payment.

GENERAL JOURNAL
Date                Ledger                           Description                                      DR                  CR
11/23/15         Credit Card Interest    Interest on $2,402.18 Bal.           28.03

.                       CC-Late Payment (Int & Fees) Lowe’s Penalty #5345   35.00
.                       CCP-Lowe’s #5345    Interest for Oct/Nov                                              28.03
.                       CCP-Lowe’s #5345    Penalty (Late Payment)                                         35.00
.                                                                                                                        $63.03           $63.03

Notice the cards recorded entries (the credits) are separated and not combined?  The reason for this is how the statement will present and in order to reconcile you need to separate the two unique items.

Technology Management of Credit Card Accounts

Most modern accounting software programs manage credit card accounts in a similar fashion to bank accounts.  There is a built in reconciliation routine allowing the bookkeeper the ability to load unrecorded entries on the fly.  For a better understanding of reconciliations please read: Bank Reconciliation – A Basic Understanding.

QuickBooks uses a separate entry screen located within the vendor area allowing for easy and quick entry of information.

I encourage bookkeepers to spend time each day updating the respective credit card accounts.  The process includes:

  1. Get prior day receipts from all credit card users.
  2. Process the receipts as one group and forward to management for authorization.
  3. Technically write up each receipt for function, project identification, phase and classification.
  4. Enter all tickets into their respective credit card accounts, scan into proper folders.
  5. Go online and review each credit card for any missing receipts; track down the missing information.
  6. Reconcile to the ledger all credit card accounts.

When the time comes to pay the credit card, use the cash disbursements system and pay the respective card at least one week in advance of the due date.  Often this can be done online. 

Control Procedures

I have already mentioned several control procedures but I will include them anyway in my list below:

  1. Separate cards into functions of business. Cards are restricted to their function only.  Gas cards should not be used for repairs or vehicle service unless an emergency.
  2. Organize the chart of accounts to match the two major groups of cards – production and operations.
  3. Cards should be restricted to an individual or to a machine (one gas card per vehicle).
  4. All receipts must be turned in daily.
  5. Receipts (tickets) are processed just like any bill received.
  6. After approval and entry, receipts are scanned to the appropriate directory and place in the credit card folder for that respective credit card account.
  7. Accounts are reconciled frequently (no less than weekly), any inappropriate activity is questioned.
  8. Immediately verify any high dollar expenditures via a phone call to the user. 

Summary

A lot of purchases in business are made with credit cards by several different employees of the company.  To control and process this information all cards are restricted to a function of business, either production or operations.  Each card is assigned to one individual or to a piece of equipment.  To process this information a separate account is created in the chart of accounts for each card and grouped based on function.

Use control procedures to properly process information and manage the volume of receipts resulting from purchases.  The bookkeeper needs to spend time each day updating and processing this information.  Finally reconcile the respective accounts frequently.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you. If interested in my services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.

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About David J Hoare 429 Articles

I spent 12 Years as a Certified Public Accountant,
Over 20 Years of Practice in Accounting and Consulting,
Controller in Management of Closely Held Operations,
Masters of Science in Accounting,
Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns