Credit Card Sales & Cash Flow Statements: What You Need to Know

Credit card usage surpasses cash at many companies.

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The use of credit cards in the United States has increased significantly since they were first introduced. In 2011, U.S. consumers and businesses charged $2.1 trillion on credit cards. Some people and businesses treat credit cards as cash or use credit cards in lieu of cash. However, whether or not credit card sales are considered cash on a cash flow statement depends on when the company receives payment.

Cash Flow Statement

The cash flow statement shows the impact of your company's profit generating, asset utilization and capital raising on your company's cash and cash flow. These activities correspond to the three sections -- operating, investing and financing -- shown on the cash flow statement. It provides a record of the company's cash inflows and outflows, making it key to any financial and operational decision making.

Credit Card Sales

Credit card sales seem simple and straightforward. However, a number of behind-the-scenes actions occur in the seconds it takes to process a credit card. Briefly, your company runs the credit card. The credit card transaction goes through your credit card processing bank to a gateway to connect to the credit card's issuing bank. That bank clears the transaction, and it then goes through another gateway back to your processing bank and on to your company. This process affects how you record credit card sales.

Operating Activities -- Cash

If your company receives cash payment within a period that only allows time for the credit card transaction to clear, you recognize the payment as cash in the operating section of the cash flow payment. This is the same treatment that checks receive. There is no need to discount the cash by the amount or percentage of merchant fees, as you include these financing costs in your operating expenses.

Adjustments

Net income from the income statement shows up at the top of the operating section on the cash flow statement. The cash flow statement assumes all the numbers shown in net income are cash. Therefore, when you make a credit card sale that is treated as cash, you need to make no adjustments to cash on the cash flow statement.

Operating Activities -- Accounts Receivable

If your company has to wait for the cash, then you would record the credit card sale as an account receivable. When companies, such as gas stations or retail stores, accept specialty credit cards, they must typically wait awhile, often for one billing cycle, to obtain the cash. You would therefore record these credit card sales as noncash transactions on the cash flow statement. In the operating section, you would make an adjustment to cash, subtracting the amount of credit card sales from net income under operating activities.