How do credit card finance charges work

how do credit card finance charges work

Imagine having to explain these postings to an auditor; “Well, I’ll be darned. I didn’t realize that my partner Charlie used the company credit card to buy his wife a new dishwasher"

R ecording credit card purchases on your RTO books can be confusing and messy if you don’t do it right. This is especially true if you mix personal and business expenses. Often a single payment to the credit card company gets posted to Miscellaneous Expense or Office Expense, when, in fact, there are multiple charges on the credit card that belong to a variety of expense categories.

Imagine having to explain these postings to an auditor. “Well, I’ll be darned. I didn’t realize that my partner Charlie used the company credit card to buy his wife a new dishwasher.” “Right! I believe you. You weren’t really trying to bury personal expenses and claim the write off,” says the auditor. This system

might work for you if the only thing you ever used the card for was company automobile expenses, for instance, and each month you paid the full balance of the card and booked it to Auto Expense.

If not, then the business and personal charges must be broken out separately and allocated into their appropriate categories. Furthermore, the credit card usually has a finance fee. Technically, you should not be able to charge the full amount of that fee as an expense if you have personal use activity in the mix. It should be prorated.

If you can, it is best to use the card exclusively for business. Each month when you receive your statement from the credit card company, you should code or categorize each charge item on the statement. The finance charge should be coded to an account called Interest Expense or Credit Card Fees. A general journal entry would be recorded like this:

Source: www.rtoonline.com

Category: Credit

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