Significance of Double-Entry Method in Accounting Software

Accepting credit card payments is commonplace in most businesses, as statistics reveal that 80% of American consumers use credit cards most of the time. When looking for an accounting software to record all your business transactions, the best ones are those that record credit card sales using the double-entry accounting system. That way, recording of credit card payments will take into account every component of a credit card sale.

The Double Entry Method of Recording in Accounting Software

While there are accounting software that simply inputs sales based on the transaction amount, whilst categorizing the payment as either Cash Sales or Credit Card Sales, such an approach follows the single-entry method of accounting.

The accountant in charge of summarizing the entries into a financial report will still have to analyze how much was generated as Net Credit Card Sales. Bear in mind that in every credit card payment, a small portion actually applies as payment for credit card processing fees. The fees are collected by credit card companies from merchants as part of the credit card accreditation arrangement.

If an accounting software uses the double-entry accounting method, it will be easier for the accountant to distinguish the Net Credit Card Sales. The recording system will automatically reduce the amount recorded as Credit Card Sales by an outright deduction of the credit card processing fee that a credit card company collects.

Generally, it will take about 24 – 36 hours for a credit card company to process and record the transaction in their accounting books. This denotes that the merchant still has to wait for 2 to 3 days before the actual cash is transferred to his or her bank account. An accounting software that uses the double-entry accounting system will then follow through with another entry to record the actual cash received from a credit card transaction.

To illustrate by way of example, we will use American Express Cards as our model. Based on the most recent Statista report, there are about 1.103 million credit card users in the U.S. while more than half (54%) of the credit cards in circulation in 2019 were American Express (AMEX) Cards. AMEX cards are easy to activate because once a cardholder receives his or her plastic card, activation by way of confirmation can be done online via the americanexpress/confirmcard web page.

Supposing a merchant accepts payment by way of an AMEX card; this comes with a 2.5% processing fee collected from that merchant. Now here’s how a double-entry accounting software will reflect a credit card sales transaction

Let’s say a customer used his AMEX card to pay for a merchandise worth $100. An accounting software using the double-entry of recording will take into account the following:

1. On the Day of Credit Purchase

An Accounts Receivable from AMEX (Debit Entry) — $ 97.50
Payment of AMEX Processing Fee (Debit Entry) —- $ 2.50
Sales (Credit Entry) —————————————— $100.00

Take notice that the total of the Debit Entries ($97.50 + $ 2.50) is equal to the lone Credit entry for Sales of $100.00. Moreover, the transaction is not immediately recognized as a Cash increment, while the processing fee is immediately recorded as an Expense of the merchant. In effect, the fee reduces the actual Sales generated from the credit card transaction. This further denotes that another transaction will be recorded by the accounting software once AMEX transfers the cash to settle the credit card purchase of the customer.

2. On the Day AMEX Transfers Cash to Merchant’s Bank Account

Increase of Merchant’s Cash in Bank Balance (Debit Entry) ————————— $97.50
Settlement of Accounts Receivable from AMEX (Credit Entry) —– $97.50

This entry reverses the original recognition of the sales as a receivable from AMEX, while at the same time, reflects an increment in the merchant’s bank account.

Inasmuch as the double-entry method recognizes every component of each credit card sale, it will be easier for the accountant to summarize the transaction as well as prepare financial reports in a timely manner.