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.

Bank Discrepancies (Reconciling vs. Plugging)

With an abundance of accounting software available to today’s entrepreneur, the advantage of an automated system may, at times, be too user-friendly. Credence is given to the application to keep the books as a user chooses to allow the program to correct any discrepancies as in this illustration of a routine bank reconciliation.

After completing a reconciliation, if the ending balance is off, an adjustment may be generated to fix, or plug, the numbers to balance. No research is done as to why the numbers don’t jive. It is assumed the bank’s balance is correct.

The importance of investigating any discrepancy, however big or small, cannot be underestimated. The following scenarios, of which there are many, may apply:

Cash Overage: A bank statement may show a deposit credited to your account but it’s mysteriously missing from transactions you’ve recorded. With a little digging, you may find the cash receipt(s) was never entered. For the customer(s) to receive proper credit, a manual correction is necessary rather than an automated adjustment. Another possibility may be the bank had posted the deposit to your account in error. The bank will need to be notified for this to be reversed.

Cash Shortage: The opposite of the previous example in that you made a deposit but it’s not showing up on the bank statement. Mistakes happen and human error occasionally slips in where a teller may press one wrong number landing your money in someone else’s account. A quick phone call to the bank will verify all was done correctly if you’ve kept your deposit receipt.

This could also mean the deposit never made it to the bank so it’s worth the effort to research the transaction rather than letting it go. Note, if the deposit was made just before the statement’s cutoff date, it’s likely to appear on following month’s statement.

Uncleared Checks: A few stragglers repeatedly show up in your “uncleared items” list after each reconciliation. Now you are the customer and uncleared checks equate to late payments. If you see a check that hasn’t cleared for an extended period, consider stopping payment and reissuing the check.

Another common error occurs when recording transactions from sales receipts. A credit card receipt may be mistaken for a debit card receipt. Instead of posting the transaction to a credit card register, it’s been entered into a check register. A quick retrieval of the receipt will confirm the transaction.

Credit Card Reconciliations: Many choose not to reconcile a credit card statement. Instead, the statement is entered as a bill. But reconciling a credit card statement is equally important.

A reconciliation will monitor any returns/refunds confirming that all transactions have been properly credited to your account. You’ll confirm that your last payment was received and last, but furthest from least, you’ll ensure that no unauthorized charges have taken place.

As menial as monthly reconciliations may seem, thanks to automated systems, the urgency of diligently and accurately processing them will remove any red flags from your cash flow. Having transactions cleared keeps the books clean and all questions answered.