Journal Entry for Credit Card Purchases

Credit card purchase is a transaction in which a company uses a credit card to pay for the purchase.

Credit card is issued by the bank or other financial institutes which allows the cardholders to borrow cash to settle with suppliers. The credit cardholders use the issuer’s cash to pay for the purchase. The cash will flow from the bank to the suppliers’ account. Later on, the cardholders have the obligation to pay back to the card issuer. The payment includes both principal and interest based on the agreed term.

Credit Purchase is the business transaction that buyer receives goods or services from seller but does not yet make payment. Buyer promise to settle in the future base on the purchase term and condition. The buyer has obligation to pay back to the suppliers. It is the liability that needs to settle. It is mostly recorded as the accounts payable on the balance sheet.

Cash Purchase is the purchase the buyer settle the balance with the seller immediately after receiving goods or service. Buyers need to use their own cash to pay for the purchase.

Credit Card purchases seem to fall between credit and cash purchases. The buyers do not use their cash to pay for the goods or services. But the seller receives cash immediately after purchase. Seller receives cash from bank instead. Buyers still have the obligation to pay for the purchase, but it is the obligation toward bank, not the seller.

Credit card purchases require the company to record the liability account toward the bank or card issuers. The company has the obligation to settle with the bank.

Journal Entry for Credit Card Purchase

The company makes a purchase and paid using a credit card. It will impact the purchase transaction and increase liability to ward the bank or financial institution.

The journal entry is debiting assets or expenses and crediting the credit card liability.

The transaction will increase the assets account such as fixed assets, inventory, and so on if the company purchases these kinds of assets. It may increase the expense if the company pays for the service.

Example

Company ABC has used the credit card to purchase the furniture in the store. The total purchase cost $ 5,000. One month later, the company settle the purchase with bank with the interest of $ 50. Please prepare a journal entry for credit card purchase and settlement.

ABC has purchased the furniture for $ 5,000 and settled by using credit card. It means the company uses bank’s cash to pay for the purchase. The company receives fixed assets and has the obligation to settle with the bank.

The journal entry is debiting fixed assets – Furniture $ 5,000 and crediting credit card liability $ 5,000.

The entry is increasing fixed assets $ 5,000 as the furniture arrives and is ready to use. It also increases the liability $ 5,000 which needs to settle in the future.

When the company settles the credit card balance with the bank, it attaches with the interest expense of $ 50.

The journal entry is debiting credit card liability $ 5,000, interest expense $ 50, and credit cash at the bank $ 5,050.