Customers may request refunds for a variety of reasons, and it’s important to know how to deal with refunds from an accounting standpoint. The steps you take vary depending on the type of refund, whether inventory is involved, and your accounting methods.
Accounting for Cash Refunds
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. Then, debit this column and move the credit to the cash column when you issue the payment to your client.
If inventory is returned to you in sellable conditions, you need to update your inventory records accordingly. However, if you cannot resell the item, you should record a loss. If you have a significant amount of inventory losses, you may want to devote a column to loss on write-down of inventory. When you write off inventory, you need to offset debits in this column with credits to your inventory asset account. However, if you have a relatively insignificant amount of losses, you may simply want to record the loss with your cost of goods sold. Again, you should record the loss as a debit to your COGS and record a corresponding credit in your inventory assets.
If you are refunding an invoice you have issued and have not received payment yet, you need to record the funds differently. 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.
Claiming a Loss
In cases where you issue the invoice at the end of the fiscal year but issue the refund in the new year, 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 uncollectible.
Refunding QuickBooks Online Payments
Processing a refund using accounting software can be easier than entering the debits and credits manually. Additionally, if you use QuickBooks Online payments or QuickBooks-compatible POS software, you can issue a refund using your payment program. Then the program automatically syncs the refund with your accounting records.
Goods and Services Tax
If you issue a refund for a sale that included goods and services tax, you should return the tax that was paid to the customer. When you submit your GST/HST return to the Canada Revenue Agency, make sure to note all of the GST/HST that you collected during the period. If you have refunded any previously reported GST/HST, you should note this as well.