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Level 3

Bookkeeping Transaction Question

I provide a payment facilitation service to another party.
This party runs an eBay business for which it uses Amazon as the source for the goods.
I provide the other party with a credit card with which it buys the goods. The card receives a cashback for each purchase from which I get paid a portion (my fees)
The card is under my name, however, the card is paid off by the other party's U.S. bank account (it's bank is linked to my card account. The method of payment is Bill Pay which my customer setup in its online banking)
I don't know how to enter the above workflow in my books. Any ideas will be helpful.
Also, sometimes the credit card company mails a check to me, the account holder, in cases when my client overpay (pays more than the outstanding balance) and/or pay in advance.
If I then deposit such check, how do I enter it to the books in a way that doesn't classify it as an income as it is not (it is my client's money).

7 Comments
Highlighted
Community Champion

Bookkeeping Transaction Question

Last question first. Any money you receive in your name despite who you say it belongs to is income to you. If you then transmit the funds to your client then it is expense and is a wash.

 

Workflow for the rest. Enter credit card charges as YOUR purchase of items for resale. Enter the clients payment against your card as sales income of the items you just purchased. It is your card - these are your items not theirs - at least not until they pay you by paying your card.

 

This is a dangerous business to operate. What if they stop paying the card and you do not have possession of the goods   It is your FICO score on the line

Highlighted
Level 3

Bookkeeping Transaction Question

Regarding your last paragraph about the riskiness of the business model:
The client always prepays and overpays, meaning he setup his Bill Pay to always pay off the card balance before the statement is issued and in greater amount than what will be on it.
So there is no room for mistake here.
This business called Payment Facilitation and is common in the industry of eCommerce
In the bookkeeping workflow you suggested, how do I show that my only income is my portion of the cashback?. When client pays off the card he pays out-of-pocket less amount of what was purchased because the ongoing cashback is used as account credit, hence, to pay off the balance.
So basically most of the cashback goes to my client and I am left with small part of it as my income (profit) out of this business model

Highlighted
Community Champion

Bookkeeping Transaction Question

Is this card in your personal name or is it in the name of your business? If personal my take would be that as I described before, all the charges for purchases are your COGS (cost of goods sold) and all of the payoff of the card is in turn your income against those costs. 

 

As a business account you would have to establish trust account relationships where you have written agreements to collect funds on behalf of client for disbursements - but even then it can be a little tricky to keep track of those balances and you would not be allowed to comingle any trust amounts between other clients.

 

Let me ask this, does this credit card ONLY accept charges on behalf of your sole client? I mean do you have more than one client charging on this card or expect to? Or (I hope not) do you also charge your own purchases on this card? That would constitute, in my view, co-mingling and the reasoning to claim all charges as your expense and all payments as your income.

 

As far as the excess the client pays on the card, how is that reconciled? How do you actually collect those funds unless you are also using the card?

Highlighted
Level 3

Bookkeeping Transaction Question

Hi John, To answer your questions: The card is a small business card by CapitalOne If I classify the purchases as COGS and the payoff as income against the costs then I will end up with more costs than income at the end of the month because of the cashback. The cashback is used every end of cycle to pay off the balance and the remainder is paid by my client directly from his bank account. So how does this workflow lines with what you suggest?, I'm confused here. With the cashback taken into account, the COGS and payoff off set each other, however the cashback is the declared taxable income. When you say 'as a business account', do you refer to how my account is setup in Quickbooks? When you say I need to 'establish trust account relationships', do you mean in the Quickbooks, in the Chart Of Accounts or elsewhere?, I misunderstand. There is no co-mingling here as this credit card is used solely 100% only for the purchases of my client. I don't know how to reconcile the excess payment, eventually they balance out because future purchases will be made against those extra payoffs.
Highlighted
Community Champion

Bookkeeping Transaction Question

In this situation I think the cashback reduces actual COGS due to its use as a discount at time of payment. The cashback may or may not be reported to you on a 1099 but my first thought is that like personal cards it won't. It will be on the annual recap statement. Part of the problem is the cashback is technically 100% yours as are also the purchases since it is your name on the card. Thus the best alternative may be that the client COGS equals only what they pay. In your books you record a purchase at full value and income from cashback Here is how this might work Typical 2% cashback on a $1000 purchase is $20. Client posts purchase of $980. You post purchase of $1000, income of $20 or a vendor (card company) discount of $20 and income from sales to client of $980. Because your name is on it all you have to in my opinion post every step of purchase and sale. A trust account methodology would be where even when account is 100% in your name that all transactions are passthrough and a wash and that none of it really hits your books as income or expense
Highlighted
Level 3

Bookkeeping Transaction Question

As far as the card company, it is not reported on the 1099-K, regardless of it being a personal or business card. What is the annual recap statement? In any event, I declare it fully as a taxable income. I misunderstand your explanation below about how to post it in the books. Do I post every single purchase or as a total at the end of the month when the statement arrives? Reason I am asking is that the item purchased is always the same, an Amazon Gift Card, with which my client then buys the goods on Amazon.Most of the cashback out of the 2% goes to my client while I keep a portion of it which is my taxable income. So I still misunderstand how do I post it in a way that I pay taxes only on my portion. Let's say a $1K purchase made, $20 cashback given, when it's payoff time my client pays out of his bank $980 and uses the whole $20 to pay the remainder. Then in a separate transaction he will pay me my portion of that $20 cashback against an invoice that I issue to him. My client post all purchases and payoffs in his books. So if we choose the trust account methodology, how is it done in practice?
Highlighted
Level 3

Bookkeeping Transaction Question

When I write the message, I use paragraphs and punctuation, however, when I click to post it, it becomes all as one paragraph. How do I fix it?. I'm on the Rich Text option, is that the problem?

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