What you’ll learn to do: Compare methods of recording credit card transactions

The days of paying cash and writing checks for purchases are long gone. Most consumer purchases are made now using one of the three common types of cards:

• Debit. A debit card draws directly against a demand deposit (e.g., a checking account) balance, so there is little risk to the bank, but there are still fees associated with these transactions. The fee often depends on whether the transaction involves a PIN or not. Generally speaking, the higher the risk of fraud, the higher the fee. Your bank may have issued you a debit card when you opened your checking account. If you run your debit card without a signature or a PIN, that transaction is often facilitated by either VISA or MasterCard and treated, from the seller’s point of view, as a credit card transaction.
• Credit. A credit card accumulates a balance the consumer/cardholder must eventually pay off with interest. These balances are usually unsecured and there is a significant risk to the bank or company that issued the card. Interest rates to the consumer are high, and the fees to the seller are higher than with a debit card transaction. VISA and MasterCard are common credit cards.
• Charge. A charge card, as opposed to a credit card, has to be paid off monthly. American Express is a charge card.

For some businesses, uncollectible account losses and other costs of extending credit are a burden. Businesses can pass these costs (and risks) on to banks and agencies issuing national debit or credit cards. The banks and credit card agencies then absorb the uncollectible accounts and costs of extending credit and maintaining records.

Because they are assuming the risk of non-payment, the credit card companies charge the company a fee in addition to the interest charged to the credit card user. The fee is typically between two and six percent of sales. These costs can get expensive and some companies decide it costs too much to honor specific credit cards. Every once in a while you come across a business that requires you to pay with cash or check only, but that is becoming less and less common as consumers demand the convenience of debit, credit, and charge cards.

In addition, a company may issue credit or charge cards to certain employees, but there are risks with that decision, such as the employee using the card for personal expenditures.

Credit, debit, and charge cards make commerce flow more smoothly and conveniently, but there is a cost. In this section, we will learn how to account for those fees, as well as how to protect the business from credit card fraud through the proper use of internal controls.