Credit card rewards are a point-based system, collecting these points rewards you. Credit card rewards are not considered income in the balance sheet in business accounting. Cashback, points or miles are ways for businesses and individuals to earn benefits in the form of rewards based on everyday purchases. Recording these rewards in accounting can be challenging as it requires both precise timing and consideration of the nature of the reward.
Here in this blog, we have discussed credit card rewards, how to record credit card rewards in accounting, best practices for managing credit card rewards, and whether credit card rewards are taxable or not.
What are Credit Card Rewards?
Credit card rewards are the benefits provided by the credit card company to its users for everyday spending of the money from the card. These rewards are given to the users in the form of cashback, points and miles.
Do Credit Card Rewards in Accounting Affect the Financial Statement?
As you know, credit card rewards affect the balance sheet of the business, revenue or profit of the organization indirectly. Credit card rewards impact on the financial statements in the following ways:
- Balance Sheet: Points or miles are generally not recorded as assets because their value cannot be reliably measured and the business does not control them.
- Income Statement: Cashback rewards typically reduce expenses because they lower the net costs for the business.
- Cash Flow Statement: If your cashback is credited to your credit card account, then it should be included in the financing section of the cash flow statement as a reduction in liabilities.
Are Credit Card Rewards Taxable for an Organization?
Credit card rewards, such as cashback and points, are generally not taxable. However, this situation can vary if the rewards are earned through business expenses, you have converted your rewards to cash or used them for significant activities that produce income. Also, the cash rewards are taxable only when they are earned. If you have not redeemed the cash rewards yet, then it won’t be tax-deductible. It is the reason an accountant or a tax professional is needed in the organization for this kind of information.
Record Keeping and Best Practices for Managing Credit Card Rewards
Having the record of every single amount of money, whether it is in the form of cash, digital, assets or rewards, makes a business’s financing strong:
- Businesses should maintain an accurate record of how the rewards are earned and redeemed.
- If the points and miles are not redeemed yet and might have a real-world value, they should be tracked as intangible assets.
- The cashback from the credit card reward should be recorded as a reduction of expenses or liability.
- Use accounting software with integrated credit card tracking, which can automatically categorize rewards and track their impact on your financials.
Consult with a tax professional to maintain proper handling for tax purposes and if your credit rewards are used in income generation, then you must consult a professional.
How to Record Credit Card Rewards in Accounting?
Here are given information about how to record credit card rewards in accounting in brief:
Cash Back or Statement Credit
- For personal use, you can either treat it as an income or you can reduce the stress of the credit liability from the cashback.
- For business use, you can treat it as income or profit or reduce credit card expenses.
Points or Miles
- For personal use, track it is an unrealized asset or a reward for example, a debit reward point asset.
- For business use, you can treat it as a deferred asset until it is redeemed.
Redemption of reward
- When redeemed for cash, travel, etc., adjust the points or cash in your records. For example, Debit travel expense from it.
- Here is the answer to your Question on how to record credit card rewards in accounting.
Conclusion
Credit card rewards you with benefits such as cashback, points or miles. These rewards can be considered as taxable and non-taxable according to their use. You can track cashback as income or a reduction in the liability of the credit card and points as assets until redeemed. For businesses, reward points should be treated as an asset until used for business purposes.