The first danger is related to a machine called an ATM. You know the ones. You stick your debit card (or credit card) into them, punch in a code and you magically receive cash in your hand. With your debit card, there is generally little, if any, transaction fee when used at your bank or specifically designated ATM machines. It is very convenient.

So what’s the problem with that, you may be thinking. The problem with that for a business owner is that you must now account for that cash. You need to provide receipts showing how that cash was spent. If you cannot do that, as far as the IRS is concerned, you took a personal cash draw out of your company and you’ll need to record it as income. If it was cash used for personal purposes, then that’s just how it should be recorded anyway, but if you spent it on business related expenses and didn’t get receipts or lost the receipts, you have nothing to document that expense and you won’t be able to claim it as business expense. Now YOU might never do such a thing, but…there of plenty of other business owners who have, and their accountants are probably reading them the riot act about it. It can be very tempting to do, but don’t let that little debit card talk you into it. Resist!

The second danger of a debit card is really shared just as equally with credit cards and is related to the cash issue. It is the issue of missing receipts. You use your card to order something online or to purchase gas, meals or other items while you are away from the office. There is no problem with doing this…as long as you keep your receipts and turn them into your bookkeeper or accountant. Again, I’m sure YOU do that, but, again, there are other business owners who are bit careless with their receipts. Occasionally, they clean out their glove compartment or their billfold and hand the pile to the proper person, but this is not done regularly, and there are generally several receipts missing. With these, at least there is a record on the bank statement or credit card statement regarding the transaction, so that a receipt can be obtained. However, obtaining receipts after the fact means extra time is being spent by your staff that shouldn’t be necessary.

Debit cards. They’re the little devils in your billfold that accountants love to hate.

Many merchant accounts (these are the people that permit you to accept credit cards) just take a monthly debit out of your bank account at the end of the month, these are easy to account for, you simply enter a withdrawal in your account register for the amount debited and categorize it as Merchant Processing Fees, which should be a COGS or an Expense (this varies by where you are located and your industry, check with your accountant if you are unsure).

However, what about those merchant accounts that take the percentage before you even get the money, similar to Paypal? This makes it more difficult to track, however, I do have an answer.

(I want to say that I recommend that the following is done even if your fees get debited as a whole so that you can process the flow of your income.)

1. Open up a new bank account inside of QuickBooks, call it Merchant Account, or PayPal, or Google Checkout (whoever your processor is). Don’t hesitate to set up multiple, as a matter of fact many of my clients have multiple, so I set up an account titled ‘Merchant Accounts’ and then I have sub accounts titled PayPal, Google Checkout, Chase Paymentech under the main ‘Merchant Accounts’ account.

2. When you receive your payment for services (via Invoices or Cash Receipts) don’t deposit directly into your checking account, deposit it into the merchant account it goes into, because let’s be honest, it is not in your checking account yet.

3. As the monies show up in your checking account, transfer the funds from your merchant account to your bank account. This also makes it easier for PayPal when you may accumulate funds in the account and only make random transfers from the PayPal account.

4. Accounting for your fees/costs – can be done in one of three ways:

• If you get lump sum fees at the end of the month debited from your checking account, don’t worry about doing anything differently, just record that transaction once it posts.
• If you are using a service like Google Checkout or PayPal you can ‘see’ how much they take out via their transaction reports, so at the same time you make that transfer from your ‘merchant’ bank account in QuickBooks to your ‘checking’ bank account in QuickBooks – you can make a withdrawal entry from your ‘merchant’ checking account for your merchant processing fees.
• If you are using a more standard merchant services provider, you rarely get daily reports, and rather get monthly reports, at the end of every month when you get your reports, take the cost of the fees they charged you off of the statement and make a lump sum withdrawal from your ‘merchant’ bank account for your merchant processing fees. This is a good way to reconcile too, making sure you received all your monies, because at the end of the month after you enter the fees, the only thing left in your account should be any undeposited recent payments.

For my FreshBooks followers:

I promised you a follow up to my recent ‘making FreshBooks and QuickBooks play nicely posts’ – if you have not read them yet, check them out:

Making FreshBooks work with QuickBooks and vice versa Part 1

Making FreshBooks work with QuickBooks and vice versa Part 2

My suggestion for you all in regards to credit card processing fees is to do the same thing that I suggest above – create additional accounts for your merchant processing accounts and rather than depositing the payments received directly to your bank account, place them in their appropriate merchant account as the ‘middle man’ before it hits your bank account, and follow one of the three options above for recording the appropriate fees.

Do you have any questions or specific circumstances that I did not help you with? Feel free to comment on the post with your question(s) and I will respond personally!

Stay tuned, in the upcoming week I am going to talk about allocating Sales Tax in QuickBooks for FreshBooks users, incorporating it into my previously suggested methods for recording receivables and revenue.