Many banks will set you up with a company credit card when you set up your business bank account, others will make you wait until you have been in business long enough to establish a credit record before allowing you to apply for business credit cards.
They can be a blessing or a curse to your business depending on how you use and manage them.
Every spend on a credit card account is a borrowing until it is paid for which means that this creates a debt or a liability for your business, that should be accounted for in your business accounts.
Before we look at how to account for credit card transactions, let’s consider the advantages and disadvantages of using company credit cards.
Advantages of credit cards
Credit cards have many advantages when used wisely:
- Short term cash management – cards can be set up to take 100% of the statement balance on an agreed date in the future avoiding fees and charges and giving you control of your outgoing cash flow. If you are going to use a company credit card, this is the most cost effective way to use one.
- Useful for the occasional big purchase – a training course or a new piece of equipment. With the facility of being able to buy on credit and pay over time, it’s hard not to see the advantage of a credit card for occasional purchases. Credit card interest can be high, so only use as a last resort where the purchase adds value. Please try to avoid using credit cards for general overhead spend as this can start to get very expensive and creates additional unnecessary overhead.
- Purchase protection – many cards provide purchase protection for purchases made with your credit card which means that if goods or services that you have paid for by card are faulty or fail to be delivered then you can claim a refund from your card provider. Be careful, business purchases bought on a personal card are often not covered by purchase protection insurance. Check with your card provider before making a big purchase.
- Take advantage of introductory or balance transfer rates – as with personal cards, we recommend you shop around and change card suppliers often to take advantage of 0% interest rate periods and special offers.
- Enabling staff spends – if you want to be able to give staff the ability to spend cash on the companies behalf – say for small office purchases or expenses, but you don’t want to give them a debit card with access to your bank account then a credit card with a capped monthly spend limit may be a suitable alternative. Always make sure staff understand your policy on the control and usage of company credit card and sign a company credit card agreement which gives you the authority to recover any spends that are not authorised or considered to be ‘wholly and exclusively’ related to the performance of their duties.
- Of course, it is easy to overspend or get carried away with a credit card. Interest rates can be high and can quickly spiral out of control. Try not to use a credit card unless you can manage it wisely.
- Cash withdrawals on a credit card are usually very expensive so try to avoid these.
- You can often use your cards overseas, but again this is often very expensive. If you regularly travel abroad you may prefer to set up a special card for currency purchases where you preload the card with currency bought at a preferred rate ready to be spent abroad.
Setting up your company credit cards
Each company credit card should be set up in your accounting system and reconciled in the same way you would reconcile your bank account. Most accounting systems will have the ability to set up and manage credit card accounts alongside bank accounts. Xero, for example, will allow you to set up and manage the card alongside your bank account. Most credit card companies will allow a direct monthly feed so as your card issuer publishes your statement, Xero imports those transactions ready for you to match and reconcile. Ask your accountant if you need help setting this up.
In Xero, new cards can be set up through your chart of accounts Settings > Chart of Accounts or via Accounts >> Bank Accounts.
Personal credit cards used as business cards
If you use a personal credit card as a company card mainly for business purchases then you may set this up in the same way. Personal spends should be coded to drawings or a directors loan account.
Company debit cards
You do not need to account for company debit cards separately, as debit card transactions are debited immediately from your bank account and are treated as any normal spend.
Accounting for credit card transactions
Spend transactions are accounted for as normal purchases and paid off against the credit card account instead of the bank account. Then when you make a payment from your bank to pay down your credit card, we show it as a bank transfer from your bank account to your credit card account.
Where are some of the common errors we see when we check company accounts
- Accounting for the payment of the credit card as a ‘spend’ item. The ‘purchase’ or the cost to your business is the item or items you bought with the card not the payment against your credit card balance. Assets should be charged to your balance sheet and added to your fixed asset register and spends should be charged to your profit and loss account.
- Personal spend items accounted for as business spends.
- Forgetting to account for the monthly interest charge as presented on the credit card statement – this is a cost to your profit and loss account. Do check that the account balance on your statement matches the account balance in your accounts at the end of each month or each statement period.
- Credit card spends paid off against the bank, not the credit card account which creates and unreconciled transaction in both the credit card account and the bank account.