Use a Withdrawal Number
The first option is to record your payment as a withdrawal number assigned for online payment, or a check number, depending on how you pay the bill. The entry is recorded for the payment being made, and you can total up the purchases on the statement for the payment being recorded. With this method, the totals are lumped together for each type of expense and entered in the breakdown of the transaction. This helps ensure all purchases are recorded for tax purposes.
Set Up a Liability Cash Account or Bank/Cash Account
Another option is to set up the credit card as a liability cash account or a bank/cash account in the accounting software. This method allows each purchase to be recorded in the bank/cash account. When the purchase is recorded as a withdrawal, it can be linked to the vendor and the proper expense account for tax purposes. Additionally, the individual purchases are recorded into the system, allowing you to properly track vendor activity.
This method requires a little more discipline, but it has its advantages. When each purchase is recorded, the credit card activity can be closely monitored and tracked for suspicious and fraudulent activity.
Reconciling Your Accounts
Reconciling the credit card liability or bank/cash account must be done as a part of your month-end closing process. If the credit card is set up as a liability cash account, it will appear as a current liability in your general ledger with a credit balance. If you use a bank/cash account, it is set up as a regular bank account and will appear as a current asset. It will have a negative balance, known as a contra asset. The account will need to be reconciled monthly along with your regular bank and hedging accounts.
The liability or bank/cash account will carry a negative or credit balance. If the account is paid off in full monthly without any disputed transactions, the amount to reconcile will be $0.00 and each purchase will be recorded as a withdrawal and cleared. The payment made on the account will be entered as a credit (or a reduction) to your cash checking account from which you’re taking the payment and as a debit (or a reduction) to the liability or bank/cash account via a deposit, transfer, check, or journal entry, depending on your accounting system.
Creating a Credit Card Policy
The establishment of a credit card policy via a written standard operating procedure (SOP) is necessary.
Policies should be set in place to assist with the proper tracking of individual purchases. For each cardholder, there should be a set plan to hand off the credit card receipts, whether it be daily or weekly.
This will assist the data entry specialist with the entry of the purchases in the system as they occur, as well as make it easier to reconcile the credit card statement.
If you need help managing your farm’s credit card or financial processes, work with a team of experts to help set you on the path toward success. For more information about your financial options and ways to maximize your finances, subscribe to our blog.