to own Accounting By
Author of "Real
Life Accounting for Non-Accountants"
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
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:
|Meals & Entertainment
Credit Card Payable
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:
|Credit Card Payable
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.
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