We want to be able to track the expenses by the source vendor (the supplier of the item or service) and how that vendor was paid. For example, we might order something that had to be paid for before it is shipped, office equipment, inventory, software or other purchases. We might also want to pay a vendor after the fact with a credit card. This occurs after you have received an invoice you want to pay with the credit card to delay actual use of your cash, get airline miles or spread the payments out.
When we are processing a purchase or an invoice that we know will be paid for by putting it on a credit card at the time the transaction is completed, we will use a credit card bank to pay the vendor. You can do a payment run for invoices that you force and do a check run for the credit card bank or you can do manual payments against the invoice that are charged to the credit card bank. The source vendor will be fully paid. The liability is moved to the credit card clearing account. We recommend using a separate AP clearing account for each credit card.
When the invoice (credit card statement) is received it will be posted to the credit cards AP account. New transactions that have not been posted will be posted to the appropriate expense account. For example auto expenses, travel or other expense accounts. Those transactions that were applied as credit card payments will be charged to the credit clearing account. If the credit card is paid in full the expense accounts should have been charged correctly and the credit card clearing account should go back to zero.
Setup for credit card processing.
The Credit Card Bank is set up as normal, but the Cash Account will be a current liability general ledger account, used to track credit card liability transactions, instead of a current asset. This account will serve as a clearing account to control the credit card balance. A different check number series will be used for control purposes.
Set up a credit card bank for each credit card that you plan on processing transactions for. The bank account number should be a current liability account. We recommend a separate account for each credit card for control purposes. We would use a separate number series for credit card bank checks. You may want to change the form so that you can print it to plain paper and have it state that the amount was paid by credit card. The document could be attached with the invoice as proof of payment.
Let’s assume that we have a Visa credit card and during the month we are going to order two items from two different vendors. We charged them to the card.
We are ordering a new laptop computer from Toshiba. The purchase cost is 925.00.
We are also purchasing $2,200.00 worth of inventory. These transactions could be paid at this time by charging them to the credit card bank by a payment when entering the invoice to the vendor.
The company owner also purchased gas for his company car in the amount of 88.00 from BP. He attended a conference with a hotel bill for 650.00. He had an airfare ticket from Delta for 380.00 to get to the conference.
The total amount due is $4,243.00.
In our example, we charged the inventory and the computer purchase to the credit card when we ordered them. We did this as a manual check. The other three items were not known by the accounting department until the statement arrived.
When we receive the statement we would put the following invoice in the system.
Put the three transactions that were unknown in the system. If we have chosen to not track the travel and training expenses by vendor we would enter those expenses payable to Visa but charge the expense accounts.
If we wanted to track them by vendor we would put them in by vendor and do a check run against the Credit Card Bank and then put the total amount from the statement against the clearing by posting the invoice to that account.
The other two purchases would still be entered as an invoice and charged to the clearing account if they had not been previously entered.