In this plastic money era, any retailer refuses credit card payment will miss opportunity to increase their sales. As for any e-commerce, credit card payment is a must available. If you accept credit card payments and let your bank to involve in the payment process, sure there are a number of monthly fees you’ll need to understand and record in your book. If you are a starter, when checking out pricing, be sure you know which fees will be charged to your business on a monthly basis.
Through this short post I am going to provide way to record monthly credit card fees.
Accepting Credit Card Payments
Before getting into the specifics recording procedure, let’s go back and get a brief side trip to discuss the topic of choosing a bank to handle your credit card services. This can be an important choice that can affect the service you offer your customers, as well as the service your sales people get when they process credit card purchases.
You should make your choice carefully after getting proposals from numerous banks. Not only must you understand the monthly fees your business will be charged, but you also need to compare start-up fees. Your best bet is to develop a spreadsheet so you can easily compare these costs.
Also, don’t make your decision solely on the basis of fees. You may find the lowest cost provider does not offer the service you need or has hidden fees that are not readily apparent in the proposal. Ask for and check references from other stores actually using the banks you are considering before making a final selection.
Common Monthly Credit Card Fees
Here are common monthly credit card fees [or cost] that may be charged against your sales use credit cardit card:
- The Address Verification Service Fee (AVS) – It is a key prevention measure for fraud when credit card sales are accepted. This is primarily used by businesses that take orders by phone or e-mail and do not have the credit card in hand to verify a signature. There is a per-transaction fee to use this service.
- The Discount Rate – It is a charge based on a percentage of the dollar sale or return transaction. This rate varies greatly depending on the type of business. If you use a terminal to swipe cards, the fees are usually lower because the possibility of key-entry errors is eliminated.
- The Secure Payment Gateway Fee – It is a service provided to e-commerce merchants so they can process transactions securely over the Internet. This is usually a set monthly fee.
- The Customer Support Fee – It is charged monthly by some banks if the store wants support 24 hours a day for 365 days a year. In some cases support is offered in more than one language.
- The Monthly Minimum Fee – It is the least a store must pay to accept credit cards even if the credit sales do not generate enough in transaction fees. This fee usually ranges between $10 and $30. If you are going to accept credit cards, be sure you’ll meet the minimum or you could find the convenience offered to a few customers may end up costing you more than it’s worth.
- The Transaction Fee – It is a fee assessed for each transaction submitted for authorization. Even if the card is denied, your business will have to pay this fee for trying to make the transaction.
- Equipment and Software Fees – They are fees based on the equipment and computer software you decide to use. In most cases credit card equipment is purchased or leased.
- Chargeback and Retrieval Fees – They are fees charged if a transaction is disputed.
Next, how to record credit card Fee (cost). Read on…
Recording Credit Card Fees [Costs]
Let say you chosen to work with your bank that handles all your business accounts. And let say it has a fairly simple arrangement with fees totaling 2 percent of all credit card sales which is $11,200 for the month February 2010. So the credit card charges that would have been taken out of the month’s sales would be total $224 (=$11,200 × 2%).
At the end of the month [February 28], you will receive a statement that shows you transactions and fees for the month. Banks do not bill credit card charges and expect a company to pay the bill. Instead, credit card fees are calculated by the bank and then deducted from the account to which the credit card purchases have been deposited. This is similar to the way banks handle charges for checking accounts. The details of all charges are sent with a month-end summary of credit card transactions.
In addition to fees, any charge-backs related to disputed charges are deducted from the account and reported in this summary.
Tips: You should have a method in place to track disputed credit card sales. Keep a ledger that you use to record and track pending disputes. At month-end, assess the disputes still pending and decide whether or not to deduct them from the “Sales of Goods or Services”.
When you get your month-end summary, you need to be certain that all costs or deductions related to credit card sales are properly recorded in your books. Credit card costs would be shown in the “Cost of Goods Sold [COGS]” section of the “Profit and Loss” because they are costs directly related to sales. You may need to add a new account in the chart of accounts— named “Credit Card Fees”.
Here is the entry you would use to record the monthly credit card costs for February:
[Debit]. Credit Card Fees = $224
[Credit]. Bank ABC = $224
(To record credit card fee charges for the month of February).
In this entry, the balance in the “Credit Card Fees” account would increase, and the balance in “Checking Account” would decrease.
Note: The bank has already reduced the balance in your checking account. With this entry you are just recording the reduction in the company books, not writing a check.
Remember debit balances in the “Cost of Goods Sold [COGS]” section are subtracted from credit balances in the “Income” section to find your “Gross Profit” or “Income”. Your bottom line or net income is calculated by subtracting expenses related to overall operations of the business from the “Gross Profit”.
Let say you don’t track your credit card charges each day, instead, you wait until the end of the month when you get your statement from the bank to record the charges. Since the amount is small and there can be returns or other reasons for a charge to be rejected during the month, it is simpler to just verify these numbers when you get the bank statement.
Tips: Only you can decide when it’s worth spending the time to find the reason for an error. You may decide that even a $1 difference is critical and you want to find out why. A larger company may not scour its records unless the difference is over $100 or possibly even more. If you are an accountant, every penny is worth digging.
Customer returns that were purchased using a credit card should already be recorded in the “Purchase Returns” and “Allowances” account. When making that entry, the checking account should have been reduced as well, so there should be no need to record returns that have been subtracted on the bank statement.
If you find a major difference between your monthly totals for credit sales and the bank’s report, you would need to review your charges to find the reasons for the difference before closing the books. The most common errors relate to sales or returns that were not properly recorded.