Accounting for credit card fees

Jean Chidley's Profile

Accounting For Credit Card Fees

Is anyone aware of an accounting policy statement supporting treatment of credit card fees as an offset against revenue (e.g., cost of services sold) as opposed to an operating expense?  Our company treats credit card fees this way but I need to pull together a policy memorandum supporting that treatment.

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Good morning. My hospital records the credit card fees as an operating expense. This handling developed from relative amounts and the nature of our business - the credit card fees are a very small fraction of our expenses, and, as a hospital, our cost of sales relates more to medical suuplies.

I hope this helps.

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I suggest you read this EITF and make a case for either gross or net reporting.

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Thanks, great suggestion.

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I found this free recorded webinar titled "Leveraging Analytics & Managing Debit Card Merchant Fees" which covers many aspects of this topic:

http://www.proformative.com/resources/managing-debit-and-credit-card-merchant-fees-webinar-video

Proformative also has a

"Free Guide To Accounting Resources"

http://www.proformative.com/resources/accounting-resources-guide

It's a handy list of resources for further info on accounting questions of all kinds.

I hope it helps!

Best... Sarah

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I've never previously heard of a company classifying credit card fees directly against revenue. Here are a few thoughts pro/con.

Pro : Would want to see this on a seperate GL account or P&L Line item, treated as a sales discount/allowance. The argument here might be valid if you are following some cash method of accounting for revenues.

The Sales Discount/Allowance approach would seem to be the only potential argument. However, would expect SD&A's to be related to customer volumes, special deals, promotional pricing, sales price adjustments to resolve an issue with a customer to collect payment (in lieu of becoming a bad debt).

Cons : My experience in a variety of industries has been for this to be a G&A line item expense. It is variable in nature, driven by revenue and payment type mix. Have even gone as far to isolate on the GL account level each credit card type for the merchant processing fees, i.e. MV/Visa, AMEX, Discover, etc.

I consider credit card fees to be similarly related to collection fees/costs. In accepting credit cards, the business has decided to absorb these processing costs as a convenience to the customer, and as a way to turn sales into cash quickly vs. doing some direct AR billing, which can put at risk ever collecting the revenue from the sales, leading to another G&A line item costs for Collection Expenses and Bad Debts.

When/if you reserve for and/or write-off bad debts, where is this being classified. In following your company's accounting treatment vs. revenue for credit card fees, to be consistent, would expect bad debt accounting processes to hit revenue classification, which I think is a mistake.

Bad Debts - Once the goods or services have been delivered, you have a valid sale. This issue is collection of cash. The only instance to reduce revenue I've done is where the Sales Dept has decided to adjust prices or invoice amount to settle a dispute (quality, quantity, continuing relationship, etc.) But if Sales is not willing to do this, stands by the validity of the sale, revenue should not be impacted, the write-off cost goes to a SG&A expense classification. Since the credit card fees intent partially at least is to avoid this, why would this be a revenue reduction?

Also, ask the question - whenever you get a Credit Card charge back that the company "eats", how is this transaction recorded? Under what your company does to reduce revenue for the credit card fees, do they "unwind" the revenue, or classify this as a write-off. If hitting revenue, the COGS still exists.

Next would be accounting for and reconciling Sales Tax Liability. On the credit card charge back, Sales Taxe liablity is typically (or should be) reduced. You don't have to pay for sales taxes that you ultimately did not collect.

I like to be able to reconcile Sales Tax return receipts to revenue line items, without any significant distortion or complexitites. Credit card fees charged vs. revenue (an not isolated at the GL account level) are likely to create this reconciliation complexity.

Do you accept personal checks at the point-of-sale. If so, do you use a check acceptance approval service. Most of these typically run 2%-3% of the check amount, very similar to the cost of credit card fees. If you do this, how are these fees accounted for, should be the same as the credit card fees?

Hope this helps, Randy

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Randal - your reference to Sales Tax recovery caught my eye. We don't currently do this. I don't think it would be material to our business but I sure don't see the point in leaving cash on the table. In your experience, is this a normal and accepted (by state tax authorities) practice?

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Recording credit card fees netted against revenue strikes me as a cash-basis method of accounting, but it can later create a number of issues. You would need to ensure that returns / refunds are handled similarly. Also, credit card fees are different depending on the card type (VISA, AMEX, etc.) in addition to specific card characteristics (loyalty rewards card, CVV2 verification, etc.). This makes the handling of the discount at a transactional level extremely difficult - typically recorded once the credit card settlement statement is received.

Given all of this, I don't know what you gain by recording sales net of the discount. Practically, the discount is a cost of doing business - like staffing a collections department would be for open AR. Also, this would have a tendency to mask the opportunity to mitigate this cost when it is wound tightly into the sales side of the business. Many online businesses, for example, are turning to ACH-based methods of payment. Depending on how it is constructed, the cost of these range from a very small transaction fee to typical credit-card discount rates. Meanwhile, private-label cards with short-term financing options can offer very low discount rates on 90 day SAC type arrangements. I would find it more difficult to manage a dynamic payment method portfolio if it were wound tightly into sales.

Randy also raises a good point around credit-card chargebacks and chargeback recovery. If all of this is wound tightly into sales, I don't think it ultimately gets the attention deserved. Cash is indeed king, but financial classification and reporting is also about management of cash inflow and outflow streams.

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We do expense our credit card fees as an offset within our cost of sale account (and we are accrual base accounting). However, we leave our revenue at gross and then offset all of our costs for revenue to get to our gross margin.

Our P&L looks like:

Revenue:
Business Line 1 $500.00
Business Lien 2 $700.00
Gross Revenue: $1200.00

Cost of Sale:
Business Line 1 ($50.00)
Business Line 2 ($75.00)
Total COS: ($125.00)

Gross Margin: $1,075.00

Thanks,
Katie

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Topic Expert
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Jean,

Most if not all of our clients have an operating expense line for card processing fees whether they sell a product or service. You ask an interesting questions...I've asked our accounting firm for some additional guidance. I'll let you know what I hear.

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As long as you are recording the credit card fees as they are incurred and matching time period of recording fees against the relative revenue I don't think you have a GAAP or IFRS problem other than if the amount is material you might need to disclose the treatment in audited statements as this would not be the NORMAL classification. Since this is not a common practice, which would cause you to have gross profit percentages that were skewed and not comparable to industry norms, but it obviously won't change the bottom line net income.

Assuming you are US based you might also cause a red flag with the IRS as gross profit percentage is one of the criteria they measure to determine which companies to audit.

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