Question

Effect of credit card sales on financial statements

Answer 1

Nowdays, Companies accepts payments for their goods/servives in various ways including Cash, Cheques, Online Transfers, Debit Card as well as Credit Cards.

Credit Cards are the instruments issued to the holder by his own bank after considering his/her credit worthiness. Whenever he uses the credit card to buy something and make a payment from his credit card, bank pays the seller for his goods/services on the behalf of the Buyer and later on recovers such amount from the buyer alongwith Interest.

Now to accept credit cards, Seller also needs to install Credit Card accepting machine and his own bank provides him the same and in exchange for services, Bank charges nominal amount which is predetermined percentage(normally 2%-5%, varies by bank to bank) of sales made or amount collected. For eg 2% of Sales Made.

Hence Journal Entry for following Transaction (Sale) is not recorded as general Entry. In this case, seller will record following entry

Cash/Bank A/c Dr. $980

Credit Card Expense A/c Dr. $20

To Sales A/c $1,000

(Being Sales made & Credit card expense @ 2% Recorded)

Hence, as per normaly payment received (other than Credit cards), Financial Statements are prepared without recognising credit card expense. also in such case, Seller takes risk for any bad debts in case sales are made on account. hence he recognises "Allowance for Doubtful Debts" for such sales.

As per sales made and payment accepted by Credit card , Financial Statements are prepared by recognising such credit card expenses. Bank will pay seller immediately or after some time but its quite sure that such amount will be recovered from bank. hence no need to recognise "Allowance for Doubtful Debts" for such sales.