My business took out a Cash Advance. To pay it out my credit card processing company automatically deducts 19% of MC/Visa daily sales. Let's say that I received $22,000 and the amount I have to pay back is $40,000. I created a liability account for the cash advance amount $40,000 and a receivable account called "Discount on cash advance" for the difference of $18,000. Is this right?? And how should I expense the difference?

I'm not quite sure what you're talking about, and the details of exactly what is happening here is going to be important to how it's recorded. What I can tell you is that you would not mix a payable and a receivable together. A receivable is not a payable discount. A payable discount (assuming that's what you'd need to use) would be a contra liability and a debit, and would net against the payable. Since I don't understand the situation I don't know if that's what you need to be doing, but any discount off something like that is always a contra account - a negative account to something else, not a different classification. (i.e. a contra to an asset is a contra asset, not a liability. For instance, accumulation depreciation is a credit yes, but it's a contra asset, not a liability just cause it's a credit. Etc.)

You have a credit card charging 19%?? Sheesh.

Thank you for your answer Morgain300. Let me explain it more. The cash advance is what the credit card company describe as prepaid receivable at a discount. They give you an amount of money, and you pay them back by allowing them to deduct a percentage from your daily credit card sales. There is no fix payment. However the amount you pay back is a lot more than what you receive from them.
In my case, let's say I received $22000 from them but I have to pay $40000 back, So they will be deducting 19% off my credit sales until they collect $40000.
The $40000 will be in a payable account. The $22000 will go to my bank. Now, should I put the $18000 in a contra asset account called discount on Cash Advance Payable, or should I just put it in a prepaid interest account. I'm thinking either way they will be expensed monthly, and the 19% daily deduction will go to pay off the $40000.

You're still trying to do exactly what I told you that you can't do. You don't put a contra asset against a liability. A contra liability goes against a liability. A contra asset goes against an asset. A contra equity goes against an equity. Etc. Match them.

A contra asset would be a credit balance. A credit ADDS to a liability. You're trying to turn it into an asset because you apparently are thinking of it as the opposite of a liability. Doesn't work that way.

I don't know if there's any reason not to record the $18,000 as a contra account, but it would be a contra LIABILITY as a debit. Contra accounts net against some other account, the same type of account. Don't change the classification of it. An $18,000 debit asset (which isn't a contra asset) would not reduce a $40,000 credit liability, cause the asset isn't going to go against the liability on the balance sheet - they're in two different places.

And it certainly isn't a prepaid. What did you prepay? You didn't pay anything at all, let alone pay it up front. You got $22,000. That $18,000 isn't an asset at all. An asset has to be something the company owns or has some right or claim to. What do you have a claim to? You're the one who has to pay it.

So if you use a contra anything, it's a contra liability. That essentially will net the liability down to the $22,000. If this was short-term you could just write the interest off to the expense now, but I hope it's not short-term or this is an even worse deal than it already is.

The real truth is that I'm not sure if you should or have to count it as a discount like that. (And I don't have a book sitting by me to look it up.) Another option is just recording the payable at $22,000 and then counting the portion of payment that's going to interest the way you would on any other loan. However this is an odd situation, mostly in that I'm not sure where they're getting $40,000 from. There appears to be a imputed interest rate in that, but you have unknown payments and an unknown time. If you had equal payments each time, and knew it was going to come out to $40,000, I wouldn't be messing with contra accounts at all. (That would just be a plain old loan rather than something discounted back.) But I'm still not quite sure exactly what is going on with this -- they have to be basing that $40,000 on something, but I don't see what.

I think part of the problem is that you're confusing the terms they're using. I don't see this as a "line of credit" at all. They're outright advancing you a specific amount of money. As for it being a receivable, I think they mean on their side. (But I guess that's where you're getting the asset idea from. Keep in mind that when you speak to another company, they're speaking from their end, not yours.) So in my mind, it's still a bit questionable what exactly happened here. I just don't get where the $40,000 came from.

I know you didn't ask for commentary, but that is a HUGE amount of interest. That's like buying a small car and taking out a 10% loan for over 13 years. Or a 15% loan for 9 years. Would you do that? I hope not. This is a terrible, terrible deal. I would only do it if one, you absolutely feel you have to have that money; two, that it's worth paying that huge amount of interest on it (are you getting your money's worth for whatever its purpose is?), and three, you absolutely cannot get any other type of loan. You could buy that car with a 5% loan for 5 years and pay less than $3000 in interest. You're either going to be dragging this out over a very, very long time, or it's a ripoff, one of the two.