What Are Credit Card Receivables in Accounting?
Understand the accounting for credit card sales, from recognizing the receivable to managing fees, settlement, and transaction reversals.
When a business accepts a credit card for a sale, it gains a right to collect money from the credit card company instead of receiving cash instantly. This right is an asset known as a credit card receivable. On a company’s balance sheet, receivables are listed as current assets because they are expected to convert into cash within 24 to 48 hours, making them highly liquid.
The Lifecycle of a Credit Card Transaction
A credit card transaction involves the cardholder, the merchant, the acquiring bank (merchant’s bank), the issuing bank (customer’s bank), and the credit card network like Visa or Mastercard. The process begins when a customer presents their card for payment, which kicks off the authorization stage.
During authorization, the merchant’s point-of-sale system sends a request through the credit card network to the customer’s issuing bank. The issuing bank checks for sufficient funds or credit and verifies the account’s good standing before sending an approval or decline message back. If approved, the issuing bank places a hold on the transaction amount on the customer’s account.
The second stage is settlement. At the end of the business day, the merchant submits all its approved transactions in a batch to its acquiring bank. The acquiring bank sends the transaction details through the card network to the issuing banks, which deduct the amounts from cardholder accounts. The funds, minus interchange fees, are transferred back to the acquiring bank, which then deposits them into the merchant’s account.
Accounting for Credit Card Sales and Receivables
When a sale is made via credit card, the business records the revenue and the corresponding receivable. For instance, if a business makes a $100 sale, the initial journal entry is a debit to Credit Card Receivable for $100 and a credit to Sales Revenue for $100. This entry recognizes the revenue and establishes the amount owed by the payment processor.
The cash a business receives is less than the total sale amount due to processing fees, which are the cost of using the credit card system. These fees are a percentage of the transaction plus a flat fee, such as 2.9% + $0.30 per transaction. When the funds are deposited, a second journal entry accounts for the cash received and the expense incurred.
Continuing the $100 sale example, assume the processing fee is 3%, or $3. The business will receive $97 in cash. The journal entry to record this would be a debit to Cash for $97, a debit to Credit Card Processing Expense for $3, and a credit to Credit Card Receivable for $100.
Managing Chargebacks and Returns
Transaction reversals, such as customer returns and chargebacks, each require specific accounting. For a standard return initiated directly with the merchant, if a customer returns a $50 item paid for by card, the business debits Sales Returns and Allowances for $50 and credits Credit Card Receivable for $50.
A chargeback is a more complex reversal initiated by a customer through their issuing bank, due to a dispute over the transaction. This process forces a refund from the merchant and includes an additional chargeback fee, which can range from $15 to $25 per incident. For example, if a customer initiates a chargeback for a $50 purchase and the merchant is assessed a $20 fee, the journal entry is a debit to Sales Returns and Allowances for $50, a debit to Chargeback Fees for $20, and a credit to Credit Card Receivable for $70.