In addition to undeposited funds, another frequent problem area when small business owners are entering transactions into their accounting software is how to record credit card charges and payments.
Many small arts and crafts business owners pay for inventory and supplies purchases using a credit card. If you use computerized accounting software to keep your books, you may want to enter these purchases into your company file when you make them. This gives you a running balance of how much you spent each month on purchases so your monthly credit card statement won’t be a horrifying surprise.
Entering Business Purchases Made With Credit Cards
Most boxed accounting software systems have an option allowing you to make credit card transaction entries as they happen rather than waiting until you get your statement the next month. If you use this software option, keep your books straight by making sure you follow through in entering the purchases and the payment using the method in your software’s instructions.
Every software package is slightly different, but the usual procedure is to split each individual credit card purchase between expense categories with the total amount of the purchase automatically going to a short term liability in your chart of accounts such as Credit Card to Due to Credit Card – whatever you named it when you set up your chart of accounts.
Here’s how it works:
On Monday you go to the office supply store to purchase packing material for customer orders and a cartridge for your business laser printer. The total cost was $110; $30 was for the packing material, the rest is for sales tax and the printer cartridge. You’ll take $30 to Shipping Costs and the rest to Office Supplies.
Some businesses like to break out their sales tax into a separate expense account, others just add it to the largest expense on the invoice. Tax-wise either way is ok. Your software automatically takes the total amount charged to your short term liability credit card payable account. You continue doing the same all month as you pay for business purchases with your credit card.
Paying Business Credit Card Statements
What causes problems is if the credit card bill is paid like a regular invoice when you receive it. For example, you get the bill and just write a check to the credit card company without associating it with the transactions you’ve already entered. Problems also arise if you forget to enter all of your charges during the month prior to paying the bill. With either situation, your balance sheet or income statement accounts are going to be skewed.
If this is a method you want to use, just make sure you are committed to following it through by entering all credit card transactions and associating the payment with the entered transactions. Your accounting software will have step-by-step instructions on how to do both.
