How to record credit card payments and card processing fees

Two different things

"Credit card" covers two separate jobs in the books, and mixing them up is a common source of errors:

• Cards your customers pay you with. Money coming in, through a card processor such as Stripe, Square or your bank's merchant service, less the processor's fee.
• The card your business pays with. Money going out: purchases charged to the card, then the monthly bill paid from the bank.

Customer card payments: record the gross

A customer pays a $1,000 invoice by card. The processor keeps a fee and sends you the rest. With an illustrative fee of 2.9% plus 30 cents, that is $29.30, and $970.70 reaches your bank.

The tempting shortcut is to record a $970.70 payment. Don't. The customer paid $1,000 and owes nothing more; the $29.30 is your cost of being paid. Record both:

Done this way, the invoice closes in full, your sales are the real amount, your fees show as a cost you can watch, and the bank deposit is exactly what arrived. Recording the net instead understates both income and expenses, leaves $29.30 open on the customer, and makes your sales disagree with the processor's year-end reports.

For a counter sale with no invoice, the same idea applies: a sales receipt for the full sale, including any sales tax, deposited net of the fee. Sales tax is owed on what the customer paid, not on what was left after the fee.

Batch payouts and Undeposited Funds

Processors rarely pay out one sale at a time. They add up a day or a few days of card sales, take off the fees and refunds, and make one deposit. A Tuesday deposit of $2,412.18 might be three sales on Monday:

That is what Undeposited Funds is for. Each payment waits there until the payout arrives; then one deposit takes the three items, subtracts the fees from the processor's payout report, and lands as a single line that matches the bank statement to the cent. Without it, you either get three deposits the bank never shows or a mystery figure nobody can explain at reconciliation.

Refunds and chargebacks come out of a later payout. Record the refund to the customer (a refund receipt or credit memo paid out) and treat any chargeback fee as another merchant fee.

Your business credit card

Set the business card up as its own credit card account, a liability, not an expense. Each purchase goes on it with the right expense account:

Enter charges as they happen, or from the statement each month. A refund from a supplier is the reverse: a credit to the card and to the expense. Interest and annual fees the card company charges are their own expenses, entered the same way. Keep the receipts: the statement line alone does not show what you bought.

Personal purchases on the business card are not business expenses. Record them as an owner draw, or in a corporation as an amount the shareholder owes the company. See owner draws and contributions.

Paying the card bill

The monthly payment is not an expense. The expenses were recorded charge by charge; the payment just moves money from the bank to reduce what you owe the card company:

Posting the payment to an expense account as well as recording the charges counts every purchase twice. Reconcile the card account against each statement just as you do the bank; the closing balance should equal the statement balance. See how to reconcile an account.

Fees, 1099-K and tax

• Fees are deductible. Processing fees are a normal business expense in the US and Canada. A separate merchant fees account makes them easy to find and shows what being paid by card costs you.
• Form 1099-K (US). Card processors report your card sales to the IRS on Form 1099-K whatever the amount. Payment apps and marketplaces report when you are over $20,000 and over 200 transactions in the year. The 1099-K shows the gross amount, before fees and refunds, which is one more reason to record sales at the gross: your sales then agree with the form, and the fees appear as an expense instead of a gap.
• Canada. There is no 1099-K, but the CRA can ask for processor records in a review, and gross sales are what you report as income and for GST/HST.

In AcboBooks, payments and sales receipts go to Undeposited Funds by default. Make Deposit gathers them into one deposit and has a fee line that takes the processor's fee out of the deposit to a merchant fee account, so the deposit equals the payout. Enter Credit Card Charges records purchases and refunds on a credit card account, with job, class and billable options. The card bill is paid with a cheque or a transfer from the bank to the card account. Bank statements can be imported as OFX, QFX or CSV files and matched to the deposits, and Reconcile works on card accounts as well as bank accounts; card charges themselves are entered rather than imported. If you connect Stripe, an invoice can carry a card payment link, and AcboBooks can check whether it has been paid and record the payment.