Small-business owners and independent contractors may elect to use credit cards to purchase items for their business activities. Whether you use a credit card designated specifically for the business or a personal credit card, accounting for the expense is the same.
Recording Expenses Using the Cash Method of Accounting
The cash method of accounting is the most common accounting method for small-business owners and independent contractors, especially those with limited to no accounting knowledge. The cash method of accounting quite simply calls for you to record income and expenses when cash flows in or out of the business.
Recognition of Credit Card Charges
When you use a credit card to purchase items used in your business, money does not yet leave your business checking account; however, a credit card purchase is considered a cash purchase for accounting purposes. You can record the entire amount of the charged expense on the date you initiated the charge. If you use a dual-entry accounting system, you record an increase to the expense account for the amount of the charge and an increase to a credit card payable account. If you used your personal credit card for the purchase and will make payment to the credit card out of your personal bank account, record an increase to the owner contribution account instead of the payable account.
Credit Card Payments
If you maintain a dual-entry accounting system and recorded the charge transaction as a payable, you must record an entry to remove the payable when you pay the credit card bill. When you make payment on the credit card account, record a decrease to the checking account and a decrease to the payable account. That entry will reduce the payable account to zero. If you recorded the transaction to the owner contribution account or do not use a dual-entry accounting system and recorded the expense when charged, you do not need to take any action when you make payment to the credit card company.
Interest on Credit Card Charges
If you do not pay the full balance due for the business charge before the balance due date, and you incur interest charges on the business charge, you can deduct the interest expense for the business charge when you pay the accrued interest on the credit card.
- Intermediate Accounting; James Stice, et al.
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