Timing of recording a credit card sale when using cash basis accounting
by Ed Edwards
I work at a small art gallery that uses cash basis accounting. Our bookkeeper records credit card sales on the day we receive the payment from the credit card company and not on the day of the actual sale. This works okay for most sales each month. However, sales that take place during the last few days of each month cause a reconciliation problem because the cash is not received until the next month. She says we're using cash basis accounting so she has to do it this way. I say title of the merchandise transferred on the day of the purchase and so the sale should be recorded on that day.
What is the correct timing for recording the sale in this situation?
That's a great question.
A strict cash basis dictates that we recognize revenue (a sale) when the cash is received. This also dictates that we record an expense when paid, not when incurred.
When you have credit card sales, the cash is received when the credit card company deposits the cash into your account. That would be the time to recognize the revenue.
So your bookkeeper is right.
There is an option, though.
Many small business use what we call a modified cash basis. This allows them to accrue receivables and payables.
If you're going to use this method, you would recognize revenue at the point of sale, and you would record an expense when incurred, not when paid.
This process requires 2 new accounts - Accounts Receivable and Accounts Payable.
When you make a credit card sale, record the credit sale as a debit to Accounts Receivable and a credit to Sales.
You will have to track your credit card sales, though, and reconcile them each month to post the payments to your Accounts Receivable account.
So when the credit card company pays you, you would post an entry that debits Cash and credits Accounts Receivable.
This would let you accrue Sales. Just remember, though, if you file your taxes on a cash basis, at year end you'll have to reverse these accruals to arrive at a true 'cash basis'.
Hope that helps.