From experiencing a change of heart to dealing with a defective item, your customers may request refunds for a variety of reasons, and it’s important that you understand how to deal with refunds from an accounting standpoint. What steps should you take? The answer varies depending on the type of refund, whether inventory is involved, and your accounting methods.
Refund Accounting for Cash Sales
When you accept cash for a sale, you account for the transaction by creating a debit in the cash column and a credit in the sales column. If the item is returned, you must reverse that process and note a debit in the sales column and a corresponding credit in the cash column. If you don’t pay the refund immediately, you should put the credit in the payable column. The final step is to debit this column and move the credit to the cash column when you issue the payment to your client.
Say you sell 10 books for $50. To record this, you debit $50 in the cash column and credit the same amount in the sales column. If the buyer brings back five of the books, you credit $25 in the cash column and the same amount as a debit in the sales column.
When inventory is returned, you should determine if it’s still in sellable condition. If it is, update your inventory records accordingly. If you cannot resell the item, you should record a loss. What if you have a significant amount of inventory losses? In this case, you may want to devote a column to loss or write-down of inventory. Writing off inventory means you need to offset debits in this column with credits to your inventory asset account. But if you only have a relatively insignificant amount of losses, you may simply want to record the loss with your cost of goods sold (COGS). Again, this involves recording the loss as a debit to your COGS and recording a corresponding credit in your inventory assets.
Sometimes you have to an invoice that you have issued but for which you have not yet received payment. In this situation, when you issue the invoice, you typically record a debit for the amount of the invoice in your receivables column and a credit in the sales category. To process the refund, you should debit sales and credit receivables.
Using the above example, say you create an invoice for the sale of 10 books for a total of $50. Just as when you were recording a cash sale, you now record a $50 debit in the receivables column and the same amount as a credit in the sales column. If the customer returns five books, you need to record a credit of $25 in the sales column and a debit in the sales column.
Claiming a Loss
What do you do if you issue an invoice at the end of one fiscal year but issue the refund in the new fiscal year? In this case, you may need to report a loss on your income tax return. You can claim the loss on line 8590 of your T2125 with your bad debts. Bad debts are invoiced amounts you have already reported as income that have become uncollectable.
Refunding QuickBooks Online Payments
When you use accounting software to process returns, it’s usually easier than entering the debits and credits manually. With QuickBooks Online payments or QuickBooks-compatible POS software, you can issue a refund using your payment program. The program then automatically syncs the refund with your accounting records.
Goods and Services Tax
Sometimes you refund money for items that included goods and services tax. Now you have to return the customer the tax that they paid. When you submit your GST/HST return to the Canada Revenue Agency, make sure to note all the GST/HST that you collected during the period plus any refunds of previously reported GST/HST.
Tracking all of your financial accounts is essential, but it doesn’t have to be a challenge. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free. Processing refunds in QuickBooks makes it easier and provides financial clarity.