Wouldn’t it be nice if we could allow customers to pay on credit and not have to worry if they pay us or not?  Good news!  We can allow customers to pay using debit or credit cards.

Credit cards are either nonbank (e.g. American Express) or bank (e.g. VISA and MasterCard) charge cards that customers use to purchase goods and services. For some businesses, uncollectible account losses and other costs of extending credit are a burden. Business 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.  Yeah!  This takes the responsibility off your business but do the bank and credit card agencies take the cost and risk for free?  Of course not — usually, banks and agencies issue credit cards to approved credit applicants for an annual fee.  Our business also agrees to pay the percentage fee (typically between 2 and 6% of sales) charged by the bank or credit agency.  These costs can get expensive and some companies decide it costs too much to honor specific credit cards (ever wonder why some business will not accept American Express or Discover? or have a minimum transaction amount requirement to use credit or debit cards?)

The seller’s accounting procedures for credit card sales differ depending on whether the business accepts a nonbank or a bank credit card. To illustrate the entries for the use of nonbank credit cards (such as American Express), assume that a restaurant American Express invoices amounting to $ 1,400 at the end of a day. American Express charges the restaurant a 5% service charge on the total American express sales . The restaurant uses the Credit Card Expense account to record the credit card agency’s service charge and makes the following entry:

The restaurant mails the invoices to American Express. Sometime later, the restaurant receives payment from American Express and makes the following entry:

To illustrate the accounting entries for the use of bank credit cards (such as VISA or MasterCard), assume that a retailer has made sales of  $ 1,000 for which VISA cards were accepted and the service charge is 3% of sales. VISA sales are treated as cash sales because the cash will be deposited the next day. The retailer deposits the credit card sales invoices in its VISA checking account at a bank just as it deposits checks in its regular checking account. The entry to record this deposit is: