Sometimes new users of QuickBooks have questions about how credit card work in the software. Here are some helpful bites of information about this subject.
Aren't Credit Cards Expense Accounts?
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No. In the Chart of Accounts, liability accounts represent amounts of money owed to others. Credit cards are liability accounts, because every time we use our credit cards, we owe money to the credit card company. One nice feature of QuickBooks is that it allows us to set up a special type of account for credit cards, called, not surprisingly, "Credit Card."
But make no mistake: this type of account is a liability, and not an expense. When you buy something with a credit card, you are paying for it with borrowed money, and the money is borrowed from the credit card company. This is why credit cards are considered liability accounts.
So When Are Expenses Recorded?
When using the credit card, the expense is recorded in the Record Credit Card Charges screen, in the lower half of the screen, in the Expenses tab. Let's say you went to Office Depot and bought some computer paper with your credit card. Two things happened when you did this:
1. You incurred an expense for Office Supplies
2. You went into debt to the credit card company
When using the Enter Credit Card Charges screen, both of these events are recorded on a single screen.
How Does This Relate to Double Entry Accounting?
This above transaction is an excellent example of double entry accounting. Remember this and it will help you a lot in QuickBooks: every transaction in QuickBooks is double entry - it records two events with a single transaction. If you grasp this, and understand what those two events are in each screen, it will save you a lot of time and trouble in the long run.
Credit Card Users, Credit Card Accounts. . . How to Set Up in QuickBooks?
Even if you have multiple credit card users for a primary account, my suggestion is to have a single account set up in QuickBooks for all users. An alternative is to set up sub-accounts under a parent account, one sub-account for each credit card user. But I think the single account will be easier to manage.
The only reason to set up sub accounts is for some internal, management reason - do you really need to track the separate liability balances and expenses by credit card user? How useful will that information be? The extra work to keep track of it this way needs to be offset by the usefulness of the information.
Keep in mind, too, that three separate payments will need to be paid for each of the separate sub-accounts - this will ensure that the liability balances in QB will stay correct. My suggestion is to keep life simple and only use a single credit card liability account in this situation.
Credit Card Q&A In QuickBooks
About the Author: Jennifer A. Thieme is a Certified QuickBooks ProAdvisor who loves to write about QuickBooks issues. She brings unique insight, clear instructions, and over ten years of experience to all of her QuickBooks articles. Owner of Solid Rock Accounting Services, Jennifer's clients enjoy these same benefits on a personal and regular basis. You can too - visit http://www.jenniferthieme.com and contact Jennifer today.