Credit Card Sales

Companies that sell to consumers, such as restaurants and retail companies, usually allow customers to pay by credit card. In fact, approximately 29 percent of all point-of-sale transactions are paid by credit card, comprising a significant proportion of these business's sales.¹ Most major credit cards, that are backed by banks, handle the customer's billing, collections and related expenses. As a result, credit card companies will charge retailers a fee, typically between 2 and 5 percent of the sales price, for their services. When a business makes a credit card sale and deposits the credit card receipts with the bank, the credit card company immediately remits the amount of cash from the receipt to the business (less this small percentage charge). 

For example, a shoe store sells a customer a pair of shoes for $130. The credit card charge is 3%, or $3.90. The store would make the following journal entry:



In addition to bank-sponsored credit cards, many stores (such as department stores and gas stations) provide their own 'credit cards,' that can be used in store only. If the billing, collections and related expenses of these credit cards are handled by the retailer, not a third-party, these sales must be treated as accounts receivables.



In a third case, some major credit cards are not issued by banks. Rather than depositing the credit card slips at a bank in order to get cash released to them, receipts from sales made on a credit card not sponsored by a bank must be mailed to the credit card issuer in order to receive the funds. In this case, the amount of the sale becomes an accounts receivable until the receipts are mailed away and cash is received from the credit card issuer. The credit card expense is not claimed until the payment is made by the credit card issuer. 



However, we can not make a simple compound entry for cash and credit card expense in the case that the sale is made in one period, and the cash collection is made in the next. As a result, we have to make an entry today in order to recognize the credit card expense. 



References:

1. Cash Dying as Credit Card Payments Predicted To Grow In Volume. Retrieved from: http://www.huffingtonpost.com/2012/06/07/credit-card-payments-growth_n_1575417.html