Bookkeeping – Sales Via Debit and Credit Cards (Lesson 38)

In Lesson 36, Tracking Invoices it was explained about the importance of of gathering data. One of the forms of data gathering is the method of payment. Customer payments generally consist of four methods:

* Cash
* Checks
* Debit Cards
* Credit Cards

Historically the only two forms of payment were either cash or check. Then credit card payments became very popular in the eighties and today the preferred method is debit. Debit payments are an instantaneous removal of value from the customer’s account and suspended by the banking system until deposited into the business checking account. Typical holding periods are one to as many as three days. The suspension exists in order to process all debits in batches through the Federal Reserve.  

Credit card payments are different. Here a non bank third party creditor authorizes payment based on the card holder’s allowed credit limit. The daily amounts are grouped at the end of each day and held as they are processed by a clearing house. About three business days later the physical deposit is made into the business account. The problem is that the clearing house takes a fee out of the deposit for processing the transaction.

This article explains these two forms of payment in more detail. In addition I explain how to recognize the original amounts and fees as the deposits are made. Finally the accounting function is described and illustrated.

Sales – Debit Cards

This is now the dominant form of payment in business. The process involves using a clearing house to authorize and group the payments. Technically the process is straight forward, the customer swipes the card at a universal reader, the reader receives a code off the card for the bank and account number information and then sends a request to the bank to verify that there is enough balance in the account to cover the transaction. The bank sends an affirmative availability of funds. Once the customer hits the ‘Yes’ button or enters their PIN code, the clearing house sends an instant request to put a ‘HOLD’ for the amount of money for the purchase. The bank removes the funds from the customer’s account and forwards the funds to the clearing house. The clearing house proceeds to gather the funds for that day for the respective business. The clearing house holds the money for about 48 hours to ensure that any small banks have a chance to clear their accounts.

At this point the clearing house deposits the money into the business account. Each clearing house is different. Some take a fee from the debit deposit, others charge a flat rate per deposit or monthly amount and still others use a combination of the two forms. Most often debit card values enter the bank account for the original value of the sale. To properly account for debit card activity the bookkeeper performs a daily accounting of sales from the summation report for methods of payment. Allow me to illustrate. 

Suppose a restaurant had sales of $2,491.17 yesterday. The payment schedule is as follows:

Cash                      $392.41
Check                      210.92
Debit                    1,402.44
Credit                      485.40
Total                   $2,491.17

The physical deposit is $603.33 comprising cash and checks. The entry for debit card activity is as follows:

Date              Ledger                           Description                             DR                    CR

Yesterday     Sales                              Sales via Debit Cards                               $1,402.44
                     Deposits in Transit        Debit Card Sales                $1,402.44

This   $1,402.44 ends up in a cash account on the books. The cash structure looks like this:

Current Assets

     – Petty Cash
     – Operating
     – Payroll
     – Savings
     – Deposits in Transit

In this case the $1,402.44 is a debit value in the deposits in transit account. In total, deposits in transit will carry about $6,000 to $8,000 depending upon the volume of activity at the restaurant over the most recent few days (2-3 days of activity). About two days later the bookkeeper looks at the bank statement online as a part of the daily bank reconciliation process and notices the deposit is complete for $1,402.44. The operating account has now received the physical transaction; it is now time to make the bookkeeping entry. There are two different methods you may select. The first is a simple general journal entry that moves the value from ‘Deposits in Transit’ to ‘Operating’ in the cash accounts. Here is that entry:

 Date           Ledger                          Description                    DR                 CR

Today         Operating Cash            NOVUS Deposit       $1,402.44
                   Deposits in Transit       NOVUS Deposit                              $1,402.44

The result is operating cash increases $1,402.44 to match the actual bank activity and deposits in transit decreases in value the same amount.

The second method is a software tool and most accounting software programs have a deposit screen allowing the bookkeeper to select which particular in transit value is now physically deposited. QuickBooks has this tool and a transfer tool. The transfer tool works similar to the general journal entry and you simply enter the amount to transfer and the two respective accounts involved.

Now it is time to discuss the fees for debit cards. Most clearing houses (PayPal acts like a clearing house) take about .8% of the deposit as their fee. Many are much higher hitting almost 2%. Rarely is it lower than .8%. When the fee is subtracted from the operating account (most clearing houses have a signed agreement with the business allowing for direct withdrawal of fees) you’ll notice this fee amount during your daily reconciliation. Enter a general journal entry to record the fee to the books as follows:

Date          Ledger                   Description                 DR             CR
Today       Operating Cash      Debit CH Fee                              13.29

                  Bank Fee               Debit CH Fee            13.29

An often asked question from clients is what kind of account is this banking fee. Answer is  ‘It depends’.  For retail and those businesses interacting with lots of different customers such as fast food, automotive repair, salons and so on; it is a cost of sales transaction; in effect a cost of sales account. I encourage an account in cost of sales titled ‘CC Discounts’ which means credit card discount fees. It is clearly a direct cost of selling goods in a volume based operation.

For operations that take credit card payments in order to get paid for customer invoices like construction or contract work, the fee is a function of banking and therefore an expense under office or other expenses group.

Now for the more complex type of clearing house debit card transaction. As stated before, some clearing houses take the fee out of the physical deposit. In this case the deposit is not $1,402.44 but $1,389.25 which is $13.29 less. It doesn’t take long for the bookkeeper to match the deposit against the respective original value. It is always around 2 – 3 days later and just slightly less than the original amount.

The entry process is still the same. You may either use the general journal or the deposit transfer program to make then entry. If you use the general journal entry it will look like this:

Date           Ledger                           Description                          DR                    CR

Today       Operating Cash              Net NOVUS Deposit       $1,389.25
                 COS/CC Discounts        NOVUS Fee                           13.29
                 Deposits in Transit         Transfer of Amount                                  $1,402.44
                                                                                                  $1,402.44         $1,402.44

Remember the original daily sales amount for debit cards is held in the ‘Deposits in Transit’ account.

Sales – Credit Card Transactions

Credit card transactions are similar to debit transactions in terms of the process. However there are some important differences. First off unlike debit cards, there is no bank account to remove monies from. The transaction involves using a third party’s money that they are loaning to the customer. These third party payers have their own system of how money is handled. They include American Express, Master Card, VISA and Discover Card.

American Express

American Express grants credit to better than most individuals in terms of credit standing. They basically require their cardholders to pay their entire balance each month. American Express discounts their payment to a clearing house,  in turn the clearing house charges more for American Express transactions. It is common to have 2.5% to 4% as the fee structure. On top of this American Express transactions are run separately from the other credit cards. Those businesses utilizing American Express actually have five methods of payment:

* Cash
* Check
* Debit
* Credit Cards (Master Card, VISA and Discover)
* American Express

Again,  just like debit cards,  the transactions are held in deposits in transit until cleared. American Express transactions usually take 3 -4 days to clear the books.

Master Card and Visa

These two use a large clearing house called NOVUS to transfer monies. The clearing house company your business uses joins as a member to clear these transactions. Depending on the contract signed with the clearing house used by your business determines whether the fee is netted against the gross charges or taken separately.

Discover Card

Discover Card uses its own clearing house and often the fee is netted against Discover transactions. This is one of the reasons Discover Card is not as widely accepted as other credit cards. Look at the history reported in the bank account to determine how Discover Card transactions are processed in your business.

Summary – Sales Via Debit and Credit Cards

Many retail merchants allow customers to use debit and credit cards to make purchases. Debit card activity is preferred as the overall cost is less than credit card discounts. The accounting process simply holds the prospective deposit in transit until the physical deposit occurs. Once completed, a general journal entry is used to clear the amount from deposits in transit to the correct checking account. Act on Knowledge.

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