Not really homework...

On Mon, 17 Oct 2005 03:35:46 +0000 (UTC), in alt.accounting snipped-for-privacy@steel.ucs.indiana.edu (Gregory L. Hansen) wrote in :

Your credit card discount will end up being charged only against the sales revenue since you will not be able to deduct any of the discount from sales tax.

Sales $100.00 Sales Tax Payable 6.00 Cash $103.88 Credit Card Discount 2.12

"David Jensen" wrote

Must be AMEX, as Mastercard, Visa and Discover don't take their cut up front like that.

Why confuse the guy by listing the credits first?

You have to understand that sales tax is a pass-through based upon what the customer pays, not what the retailer earns, and that credit card discounts are an expense to the retailer to have someone else assume collection. Hence, the $6 was never part of your revenue... you simply collected it for the tax authority. The method by which you collected your money is an expense you chose and, therefore, you pay in its entirety.

Cash (debit) 103.88 CC Discount Expense (debit) 2.12 Sales (credit) 100.00 Sales Tax Payable (credit) 6.00 To record the sale

Sales Tax Payable (debit) 6.00 A/P Tax Authority (credit) 6.00 To record to whom it is payable

A/P Tax Authority (debit) 6.00 Cash (credit) 6.00 To pay tax authority

As it Affects the Income Statement Sales 100.00 less: Expenses 2.12 equals: Net Income 97.88

As it Affects the Cash Account Cash (debit) 103.88 Cash (credit) 6.00 leaves: Cash (debit) 97.88

Why are you guys making a simple transaction so confusing?

I'd post it like this:

Credit Card Co Bank 106.00 (or Cash) Sales 100.00 Tax Payable 6.00 to record the sale

The credit card charges are an expense of accepting credit cards, they do not reduce the amount of your sale. If you took cash, you would still have the sale, but no expense.

Post the credit card charges like this:

Merchant Card Expense 2.12 Cash 2.12

This is a whole lot less confusing.

Or you could compound the above:

Cash 106.00 Sales 100.00 Tax Payable 6.00 Merchant Card Exp. 2.12 Cash 2.12

And yes, they must be dealing with Amex. VISA and MC merchant accounts summarize all their activity and charge at the end of the month....

Thanks. But this kind of brings up something else I wanted to ask about. Warren, Reeve, and Fess treat credit card discounts as just another expense, e.g.

Jan. 3 Cash 1800.00 Sales 1800.00 Sales on Jan. 3

Jan. 31 Credit Card Expense 48.00 Cash 48.00 Record credit card expenses at end of month-- this example presumably assumes sales were only made on Jan. 3.

Libby, Libby, and Short create a contra-account for the credit card discount, and record that along with the sale. E.g.

Cash 2910 Credit card discount 90 Sales revenue 3000

What can you say about the two different approaches? LLS don't give an example of sales tax anywhere, as far as I could tell, but I was tempted to create a new contra-account for that, to track that specific credit-card related expense. E.g. for $100 sale at 6% tax and a 2% credit discount,

Cash 103.88 Credit card sales discount 2.00 Credit card tax discount 0.12 Sales 100.00 Sales tax payable 6.00

Looks like you've done something in-between-- treating the credit discount for the entire amount on a single line as just another expense, and recognizing it at the time of sale.

I wouldn't think the cost of doing business via credit card would be considered a discount by the merchant, but more than likely an expense.

On Mon, 17 Oct 2005 18:58:03 +0000 (UTC), in alt.accounting snipped-for-privacy@steel.ucs.indiana.edu (Gregory L. Hansen) wrote in :

Don't bother to split the two since the decrease in revenue/increase in expense are part of the sales transaction and sales tax is unaffected by it.

If a company offers its commercial accounts 2/10, net/30, how would you treat that discount. This should be the same. Whether you look at it as a contra account to revenue or a cost of sales is of no meaningful difference. You just have to be consistent from year to year.

I don't necessarily see a contra-account in the Libby, Libby, and Short example. I see an asset, an expense, and a revenue. It may FEEL like a contra-account, but it shouldn't be. A credit card discount has nothing to do with sales; rather, it is an operational expense associated with A/R. Sales were $100... plain and simple. The customer could pay by cash, check, or charge. The revenue from a sale does not change based upon payment method. My credit card discounts get recorded monthly as a banking fee... same as my wire fees (unless it is inventory), my online banking fee, and my commercial service charge get charged.

In the real world, the discount would not be recorded at the time of sale/payment. It would be recorded monthly as the statements come in.

They called it a contra-revenue account. I suppose that's pretty much indistinguishable from an expense account, but they called it contra.

I wonder why LLS did it that way, then. They're the text we're using in class, and WRF is the text I got used for $5.

That simplifies things. I just thought there might be some reason to track it seperately if business is done in multiple states, or both taxed and nontaxed things are sold.

As an instructor I find that many of the accounting textbook authors have a very simplified or else complicated view of the world. Some things they over-simplify and others they under-examine.

Credit card fees are like Freight Out, a selling expense, so I woudl NEVER report them as a contra-account. They are an expense that relates to the period, not the sales transactions themselves. Also, I would never accrue discount as the transactions went through, except for AMEX, which actually DOES take their discount up front.

Most banks send you a monthy statement with the amount of the discount on it. This varies greatly by size and type of transaction, your total volume and other factors. You have no way of knowing the amount, but you could, I suppose estimate it at a certain percentage based on historical averages if you needed to do a monthly financial before you get the statement. Most banks now have the ability to see all of your credit card transactions online as well, so you can usually get your information very quickly, and even download it in some cases.

My 2 cents.

Lance Mertz Ketchikan, Alaska

I suppose it depends on their own background. Greg's second rule of humanity is that whatever your job, hobby, or special interest is, you'll think it's more important than anyone else does. And naturally spend more time on it in when you write a textbook.

Thanks for your opinions. Accounting for credit card expenses as an expense at the end of the month seems sensible. But my textbook uses a contra-revenue account, so I'll just go along with that while I'm in the class.