This article describes an optional approach to tracking credit card purchases and payments by making journal entries and using liability accounts to track credit card balances.
Credit Cards as Liabilities
The balance owed on a credit card can be treated either as a negative asset, known as a “contra” asset, or as a liability. In this article we’ll explore the optional method of using liability accounts, however, there are several advantages to using the Contra Asset Approach.
Set Up Credit Cards
- In the Chart of Accounts:
- Create Liability accounts for each credit card you use.
- Add an Expense account for credit card interest & fees.
- Enter Beginning Balances for each credit card.
- Create a Journal called “Credit Cards” or you may prefer to have a separate journal for each card.
New Purchases & Finance Charges
Make a Journal Entry when you receive your credit card statement (example below), or make individual entries each time you make a purchase with your credit card. If you make individual entries the finance charge will be entered at the time you make a payment.
- For each new purchase enter the amount with the appropriate GL Account number, for example 5000.00 School Supplies. It may take several lines if you’ve purchased items that fall into different categories.
- Enter an additional line for the finance charge expense, if any. The total of the journal entry should be the amount of all new purchases plus the finance charge, for example $1,000.
- Offset the new purchases and finance charges by showing an INCREASE in your Credit Card Liability account of the same amount, say $1,000. This will make the Debit and Credit columns match so it is a “balanced” entry and can be posted.
- Cash Advance: If your new items included a Cash Advance you’d probably want to show this as an increase to your Petty Cash Asset Account – be sure to keep all your receipts for the cash you spent. If you spent all the cash already then just enter the appropriate GL Account numbers for the expenses.
- Other Assets: If your new items include any Depreciable Assets (like office equipment, furniture, computers, etc.) be sure to increase the appropriate asset (like 1100.00 Office Equipment) don’t count it as an expense. Ask your accountant for details.
Credit Card Payments
Credit Card Payments
- Enter the credit card company as a New Vendor.
- Set up the Standard Account Numbers for the vendor.
- Use your actual bank account as the Checkbook (the account the payment comes from).
- Place your liability account under the GL Account column (the account the payment is applied to).
- Check the box to Automatically Import these items.
- If you chose not to record finance charges and fees as part of your journal entry then include a second GL Account number for your credit card fees expense account.
- Enter a Vendor Check for the payment making sure to enter the amount as a NEGATIVE number to decrease your liability. If it is an electronic transaction (rather than an actual check) use a check number like 999 to indicate so.
Note: If you chose not to record finance charges as part of your journal entry then apply a portion of your payment to your expense account (the amount charged on your statement for interest & fees), and the remainder of your payment to the liability.
Checking Your Balance
To see how much you own run a report like the Balance Sheet. Go to Reports > Standard Reports > Expenses & Ledger > General Ledger Reports – Regional > Balance Sheet.
The Beginning Balance for your credit card liability will show what you owed at the start of the period (like the start of the month), while the Report Period column will show how much that has changed during the month and the Ending Balance, of course, shows the amount owed at the end of the period.