Recording Expenses: Credit Card Statements vs. Credit Card Transactions

When handling credit card payments using QuickBooks, small business owners may question the difference between entering a monthly credit card statement as a bill and recording credit card transactions in real time.

Entering a monthly statement as a bill involves creating your credit card provider as a vendor. Upon receipt, the bill is entered under the vendor center pulldown menu using the statement date. The total due is recorded, after which, an option to split expenses is provided (for use with multiple transactions and expenses). Interest charges are also recorded and a payment is scheduled. A full or partial payment can be made however, when entering future bills, the user must be mindful not to enter previous unpaid balances which would result in overpayments.

When recording a bill, if a statement period’s beginning and ending dates fall in the middle of the month, the billing date combines the total charges of two months of activity. Therefore, actual expenses for the calendar month are not reported accurately.

Entering individual transactions as credit card purchases in real time is done throughout the month. Transactions are expensed as of the date of the receipt of purchase. This process is more accurate for month-end financial reporting and allows for monthly statement reconciliations.

Recording your credit card activity as it happens involves creating your credit card account as a credit card in the chart of accounts versus creating it as a vendor in the vendor list. A running balance will show on the balance sheet and will decrease when payments are applied to the credit card account.

In addition to more accurate reporting, a credit card account can be reconciled upon receipt of the monthly statement. This is done in the same manner a bank statement is reconciled by accessing the credit card register and choosing the option to reconcile. Here, interest charges are entered and a payment date is scheduled. Any returns or credits are also confirmed as processed by the vendor.

Either way expenses are recorded and payments are processed. When recording credit card transactions, your best bet is to show your credit card as a credit card on your balance sheet. This provides an accurate snapshot of your financial statements and tracks all monthly activity.

In this author’s opinion if a reconciliation is ever possible, especially if multiple company credit cards issued, choose to do so. A double-check on where your money is going is always in a small business owner’s best interest.

Commingling Funds in a Small Business

When funds are scarce and liabilities are due, some business owners may be tempted to combine business and personal financial obligations. However dire the circumstances, using company funds to pay personal debt and expenses or vice versa is ill-advised.

Among the transgressions that could potentially wreak havoc on your company’s financial statements are the following transactions:

  • The deposit of business checks into a personal account.
  • The transfer of funds between business and personal accounts.
  • The disbursement of business checks to pay personal credit cards and personal expenses.
  • The use of a company credit card for personal purchases.

Of the many nightmares misuse of cash creates is the confusion to be had when filing tax returns. Explaining to the IRS the differentiation between business and personal transactions when merging them is a headache you don’t need.

Commingling funds discredits the financial profile of your company. The statement of cash flows is skewed. The balance sheet is inaccurate and discrepancies surface on the profit and loss statement. The result being inaccurate tax liabilities and a bogus bottom line.

Preventing the aforementioned scenarios is simple.

  • Have a buffer. A minimum savings of six months of expenses will suffice and continue adding to it. Keep separate savings accounts for your personal and business expenses.
  • Create a budget and stick to it. Both a business and a personal budget will keep you on track and prevent overspending.
  • Limit credit card debt and pay off balances within a short period of time.
  • Deposit business checks into your business account and pay yourself. This allows disbursement of funds from the appropriate sources of income.

Remember that commingling complicates your bookkeeping and jeopardizes the progress of your business. Business income is used to support business operations which includes your paycheck.

Abiding by this simple rule of keeping distance between your business and personal financial obligations will help ensure the stability and success of your small business.

The Swipe

Debit or Credit? How many times a day are you asked this question? Many of us pay with plastic for both big-ticket items and everyday purchases. Whether it be for convenience or choosing not to carry cash, the swipe is used more often than not.

The best answer: credit. When opting for credit, you’ll save on bank fees. However small, those pennies add up over time. Using your credit card will also incur fees, however, they’re charged to the merchant and not the consumer.

Another benefit is that you’ll build up your FICO score. If trying to repair your credit rating, using your credit card will aid in the process and help raise your score. If trying to establish credit, funding your checking account to pay with credit is a good start as you’re not creating any debt and developing sensible spending habits.

So when given the choice, choose credit. For the consumer, it’s a win win!

Overspending

If you keep a household budget, the story of your life can be read in its line items. Mortgage, rent, utilities, insurance, groceries, savings, etc., are itemized to guide you through the year prudently. The problem arises when temptation creeps in. Suddenly your budget is buried in “miscellaneous” purchases. These are impulse purchases and the goal is to avoid these splurges and keep your money in your pocket.

There are telltale signs of overspending. Your credit cards are maxed out to compensate for the negative cash flow. You can only afford the minimum payment on credit card balances. Your spending habits leave little cash to pay your monthly expenses. And a big one, the stress of it all is damaging your health, mentally and physically. The financial and emotional damages are reversible. Here are a few simple steps to save your credit score and put you well on your way to financial freedom.

If you haven’t already, create a budget. If you have one, take some time to make improvements if it’s not working. Take one month to analyze where your money is going. In addition to your monthly expenses, track every purchase. Be sure to include take-out dinners, social events, and your daily coffee run.

Compare the actual costs to your budgeted line items and assess the variances. You may find you need to cut back on entertainment to make bigger payments on credit card balances. Knowledge is power; utilize your budget to improve your spending habits.

Use the cash-only method. Pay yourself a fixed amount in cash on a weekly basis. This is your spending money to be stretched as far is it could go over a seven-day period. Each payday, fund just enough to your checking account to cover your expenses, including necessities such as fuel and groceries. Use your debit card to pay for these items. You’ll know what you need from your budget. Every dollar should be allocated to an expense.

Your goal is to get your checking account down to zero (or as low as you can without accruing bank fees) until the next payday. At the end of the month, if a surplus is left after paying your bills, transfer it to your savings. The goal is to spend only what you need. If there’s no cash available, you won’t spend it.

Consider leaving credit cards at home. You’ll find once your credit card balances are paid off, you’ll have the freedom to make cash purchases. You’ll also see your savings grow at a faster pace.

Practice delayed gratification. Small rewards at scheduled intervals will help motivate you to keep your new spending habits going strong. If you have your eye on that new lawn mower, work it into your budget. Break down the cost into monthly installments over a short period of time. Saving this way will allow you to make the purchase in cash while paying down your debt. You can work any future purchases into a budget be it next year’s vacation, dining out once a month, or a day at the spa.

A little planning, self-discipline, and structured spending will go a long way. When you review your budget at the end of the year, you’ll notice a significant savings and a decrease in debt. Your actual totals, with a slight increase, will be your budget for the following year. The difference being, you’ll have already conquered your habit of overspending.

Home Equity

The value of your home is greater than any other asset. An equity line used for home improvements will increase the property’s value. If absolutely necessary, take advantage of your equity for emergency purposes only.

Paying off credit card debt, buying a new car, taking a vacation, college tuition; these are things that don’t warrant a second mortgage. Consider the risks when using your home for collateral.

Protect your biggest asset.

Rule of Thumb

Be conservative when planning to purchase a new home or searching for an apartment. Budget no more than 30% of your gross income on a mortgage or rent payment. This leaves room for other debt and living expenses in addition to building a savings fund.

With a good credit rating, your mortgage may be approved at a higher percentage rate. Keep in mind just because it’s been approved doesn’t mean it’s affordable. Live beneath your means to prevent becoming “house poor.”