Rent to own Accounting By John Day, MBA
Author of "Real Life Accounting for Non-Accountants"

Imagine having to explain these postings to an auditor; “Well, I’ll be darned. I didn’t realize that my partner Charlie used the company credit card to buy his wife a new dishwasher"

Recording credit card purchases on your RTO books can be confusing and messy if you don’t do it right. This is especially true if you mix personal and business expenses. Often a single payment to the credit card company gets posted to Miscellaneous Expense or Office Expense, when, in fact, there are multiple charges on the credit card that belong to a variety of expense categories.

Imagine having to explain these postings to an auditor. “Well, I’ll be darned. I didn’t realize that my partner Charlie used the company credit card to buy his wife a new dishwasher.” “Right! I believe you. You weren’t really trying to bury personal expenses and claim the write off,” says the auditor. This system might work for you if the only thing you ever used the card for was company automobile expenses, for instance, and each month you paid the full balance of the card and booked it to Auto Expense.

If not, then the business and personal charges must be broken out separately and allocated into their appropriate categories. Furthermore, the credit card usually has a finance fee. Technically, you should not be able to charge the full amount of that fee as an expense if you have personal use activity in the mix. It should be prorated.

If you can, it is best to use the card exclusively for business. Each month when you receive your statement from the credit card company, you should code or categorize each charge item on the statement. The finance charge should be coded to an account called Interest Expense or Credit Card Fees. A general journal entry would be recorded like this:

Note that the personal item posted to the Owner’s Draw account. That works if your RTO business organization is a sole proprietorship. If the organization happens to be a partnership then the personal expense could be posted to the partner’s guaranteed payments account or his/her capital account. If the organization is a corporation, the personal expense would have to be recorded to the employee advance account and reconciled through the payroll system.

Or, the individual with the personal expense could simply reimburse the company. In this case, the Miscellaneous Suspense account would suffice. Record the personal expense as a debit to Miscellaneous Suspense, and, when the cash reimbursement is received, record a credit entry to Miscellaneous Suspense and a debit entry to Cash.

Credit Card Payable is obviously a liability account on your balance sheet because you owe this money. When a payment is made to the credit card company the liability is being decreased. The charges that created the liability were recorded earlier to their appropriate categories when the statement came in. If you were to make a payment on your credit card for $200, the transaction would look like this:

However, since a payment would most likely be coming out of your check register, you would not have to write a general journal entry. The category called Credit Card Payable would simply be coded next to the check and entered via a cash disbursements journal into your computer, or, automatically entered if you use computer checks.

The beauty of this simple method it that the Credit Card Payable account balance should always equal the balance on your credit card statement. In addition, all the charges get allocated into the proper categories in their correct amounts.