I run a consignment store, selling goods on behalf of suppliers. Recently, I purchased a POS system that includes merchant fees in the selling price of goods. Therefore, when I enter supplier inventory into the POS system, I increase the price by 4% to cover merchant fees, and the increased price is shown on the price tag. If a customer pays by credit card, they pay the price on the tag (including the 4% fee); if a customer pays in cash, they receive a 4% discount, and the actual amount paid equals the supplier's original selling price.

For example: a bookcase has a tag price of $104, which is $100 plus a 4% merchant fee. If a customer buys it with a credit card, they pay $104. At that point, I record the credit card sale entry as: cash (or accounts receivable) $104, sales revenue $100, and merchant fee payable $4. Is this treatment correct?

However, in the case of a cash sale, I only charge the customer $100, and the entry is cash $100 and sales revenue $100, but the inventory in the POS system is tagged at $104. So, how should this $4 difference be handled?

Regarding the above questions, the following points need to be clarified:

  • Credit card sale entry: Debit cash (or bank deposits) $104, credit sales revenue $100, and credit "merchant fee payable" (or "credit card fee liability") $4. This entry correctly reflects the actual cash received and the fee owed to the acquiring institution.
  • Cash sale entry: Debit cash $100, credit sales revenue $100. However, the cost or inventory value in the POS system remains $104, which causes a mismatch between the inventory book value and sales revenue.
  • Handling the difference: For cash sales, the $4 difference is essentially a "cash discount" or "sales discount." It is recommended to recognize a discount expense at the time of sale, i.e., debit "sales discount" $4 and credit "inventory" (or "cost of goods sold") $4, to adjust the inventory value to the actual selling price. Alternatively, a more reasonable approach is: when entering inventory, record the cost of goods at the original price of $100, and treat the 4% markup separately as a "fee reserve" or "deferred revenue," then recognize it at the time of sale based on the payment method.

Specifically, if the latter method is adopted, when a cash sale occurs, you should reduce the previously recognized "fee reserve" of $4 and simultaneously recognize sales discount income (or directly reduce sales revenue). However, given that you have already entered inventory at $104, it is recommended to make the following adjusting entry at the time of cash sale: debit "sales discount" $4 and credit "inventory" $4. This way, the inventory cost is reduced to $100, consistent with the actual cash received.

Additionally, tax implications should be considered. If sales tax is calculated based on the price including the fee, then a discount on cash sales may affect the taxable sales amount. It is recommended to consult a professional accountant to ensure compliance with local tax regulations.

In summary, your credit card sale entry is correct, but cash sales require additional adjustments to inventory and discounts. Through the above treatment, you can ensure that the financial statements accurately reflect actual transactions and fee costs.