I recently received a question through our Facebook group, “Diane Kennedy’s US Tax Group.”
This is a question, or misunderstanding, that accountants deal with frequently. How exactly do you record payments that you make for your company with a credit card? In this case, the question related to Quickbooks, but it could be the same with any accounting software.
We strongly recommend that our clients (or better yet, their bookkeeper) regularly reconcile both the bank account and credit card statements. In order to do that effectively, you need to make sure that you keep your business credit card(s) separate from your personal credit card(s). If you commingle your expenditures on one card, you will have a more difficult time with the accounting and you also put your business at risk if you’re trying to put an asset protection plan in place. Commingling funds and credit is the number one reason why people get in trouble with their businesses. If you have commingled and are later sued for something that happens with your business, a lawsuit will likely allege that you have run your business as an “alter ego”. In other words, you ran it like your personal pocketbook. And that means all of your personal assets are at risk in a lawsuit.
But right now, let’s talk just about the account. When you make a purchase with your credit card, the expense is debited, or charged. The offset, because there is always an offset in double entry bookkeeping, is to the liability, or credit card account. At this point, the expense is recorded. Then when you pay off the credit card, the liability is offset (reducing your credit card balance on the books) and cash is charged. Your cash reduces. Your liability reduces. The expense isn’t charged again. It was charged the first time when you made the expense.
A good software program, set up properly, will walk you through those steps. Your job is to make all of the entries are properly recorded and that you regularly reconcile the accounts.