There are 2 ways to look at fees charged by your merchant account provider.  You can treat them as a cost of sales (or COGS) or count them as an expense.

Cost of Sales Method

Treating the fees as cost of sales (also called cost of goods sold) would put these fees into the top of your income statement.  This means it will be part of your gross margin.  So the formula would be:  Income - cost of product - credit card fees = Gross Profit. 

Since you will not have any card fees if you have no sales it makes sense to think about these fees as a cost of sales and include them in your gross margin.

Also, we believe putting these fees at the top of your income statement will keep them front of mind since they will not get lost with the rest of your monthly fixed expenses.  If they are top of mind you will always be reminded to check how much you are being charged and see how you can lower this huge cost which is usually a percentage of sales. 

Expense Method

If you count these fees as an expense it will be grouped in with your rent, electricity, phone service etc.  This is a fine way to handle it too but we feel it can get lost with those other expenses when you look at your monthly income statement.  

Rent, phone, internet, electricity expenses generally are the same each month but your card processing fees are a percentage of sales. When you scan your income statements month to month you will easily see if those fees are out of line.  But with merchant fees they are directly related to sales so the end number can vary a lot month to month making it harder to see if they are out of line when they are in the expense section.  

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