The world was already on the way to going cashless, and the COVID-19 pandemic accelerated that. When we were all in lockdown, just about the only way to pay for anything was by credit card or using an app on our phone. That means that businesses of all sizes are seeing a surge of transactions using credit cards, on both the income side and the expense side. Plastic makes it easier for our customers to pay us, and easier for us to pay our vendors and suppliers. But that ease of payment on the front end comes at a cost of complexity on the back end. Reconciling credit card transactions can be a lot harder than reconciling a bank account.
Credit card reconciliation is the process of ensuring that the transactions made with credit cards match the transactions that show up in your general ledger. Like most account reconciliation processes, it’s how we verify that the transactions on both sides are complete, correct, and valid. Reconciliation is an essential part of the closing process, and it’s how we ensure the integrity of our records. This is where account reconciliation software comes in big time, but more on that later.
As mentioned above, credit card transactions impact both the expense side and the income side, which means we have two kinds of reconciliations.
Credit card statements This is the expense side. Payments that your organization makes for goods or services with credit cards are reconciled using your monthly credit card statements. If your organization issues credit cards to executives, managers, or other team members, each one of those must be reconciled.
Credit card merchant services This is the income side. When a customer pays you by credit card, that payment is processed through your merchant account provider, which serves as an intermediary between the point-of-sale terminal or online gateway where the transaction occurs and your bank account. Reconciling these transactions is a bit trickier than reconciling the expense side, but with a few tweaks, it’s certainly doable.
Banks and credit card processors can make mistakes. You can’t rely on their statements to be 100% correct every single time. Things go wrong in these processes occasionally, so you need to be sure that the transactions on their end match what shows up in the general ledger. I can guarantee you that your auditors will want to see your reconciliation reports.
Fraud is the biggest reason for regular reconciliation. Even though banks and credit card companies are increasingly utilizing artificial intelligence and machine learning to detect fraud, the system isn’t perfect yet. A human eye and inquiry is still the best detection method out there.
Both types of credit card reconciliation use the same basic process: checking the transactions on a statement or from a download against the transactions in your financial records. Let’s start with reconciling credit card statements because that’s simpler.
This process starts with collecting the documentation. You’ll need the statements and receipts for credit card purchases for all of your company credit card accounts. This may mean chasing people down, unless you have a tool for managing employee expenses. Next, you’ll compare the transactions in your accounting system to those on the credit card statement. Depending on what accounting system you use, the credit card reconciliation process may be built into the software, as it is in QuickBooks, or you may need an external tool to help out.
First, make sure that credit card fees and interest charges are also recorded in the general ledger. Next, most people find it easiest to match the total amounts of payments and other credits on the statement to those in the GL. If they don’t match, you’ll have to investigate.
The final step is to match the purchases on the statement to those in the GL. At this step, you may also be checking that purchases are coded to the correct chart of accounts, depending on how credit card purchases get into your system.
If your company issues credit cards to employees to pay for travel and other business-related expenses, they may occasionally make personal purchases. These should be paid by the employee, so, business owners, keep an eye out for them. Ideally, this should be a rare occurrence.
Credit card statements rarely have an ending date that coincides with the end of the month. That means for the month-end close, you may need to perform an extra reconciliation to make sure you capture all the purchases between the statement date and month-end.
Reconciling your merchant services account is a bit trickier than reconciling your credit card statement because of the way credit card processors handle transactions.
Credit card processors charge a fee for every transaction, which they may deduct from the amount deposited in your bank account. This means the transaction amounts from your sales reports won’t match bank deposits. A best practice is to ask your credit card processor to charge that fee once per month instead of with every transaction.
The other thing that makes reconciling merchant account transactions tricky is that your sales transactions appear in detail, but the bank deposits are lump sum amounts. Sometimes these lump sum amounts match the total of credit card sales on a given day, but more often than not, there are timing differences. You might receive the cash for a credit card sale a few days after your customer makes the payment, depending on how your processor handles the transaction. If you have a high volume of purchases running through your credit card processor your accounting team may want to reconcile those transactions daily.
To get around the timing issue, many accountants set up a clearing account for each type of credit card accepted. Credit card sales are recorded as a debit to that account. Make sure to record the transaction ID in the memo field to make it easier to reconcile.
When you’re ready to reconcile your credit card transactions, download the detail from your processor that shows the transactions included in the lump sum deposits. Match those to the transactions recorded from your credit card sales, making sure you also match the transaction IDs. As you clear the amounts that make up one of those lump sum deposits, make a journal entry to move that amount from the clearing account to your cash account. That way, when you do your bank reconciliation, whether through specific software or with an Excel template, you have a transaction that matches the lump sum deposit that will appear on your bank statement..
Chargebacks add yet another wrinkle to the challenge of reconciling your merchant account. These happen when a customer disputes a transaction, and the credit card processor refunds their credit card, and pulls the cash plus assorted fees out of your bank account. Some of these may be legitimate, but others may be fraudulent. Investigating these can be time consuming and expensive.
We’re still a ways from moving completely away from cash flow, but we are clearly headed in that direction. Understanding how to reconcile these transactions will help your accounting team ensure that your company’s financial records are correct and keep you safe from fraud.
As CEO and Co-Founder, Mike leads FloQast’s corporate vision, strategy and execution. Prior to founding FloQast, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.
