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Level 4

Workflow Question Accrual Basis

I run an online subscription-based service.
The accounting is accrual-basis.
At the end of every month the processor issues and sends a statement in which all settlements are listed. Refunds and chargebacks are also listed, however, some of the chargebacks apply to previous months' transactions. As long as those chargebacks are at the same year, it should not affect the reporting, however, what happens when a chargeback for a transaction occurs (and deducted by the processor) in the next/following year?
On the 1099 form the processor doesn't show any deductions but just the gross sales.
I collect and post all deductions and deduct them from the gross sales at the end of the year.
But what should I do about those deductions that come in the next year?

Content Leader

Workflow Question Accrual Basis

Good afternoon, @EBFinancials.


My short time spent studying Accounting was as much a gift as it was a curse when it came to learning QuickBooks. The idea of a transaction which straddled two fiscal periods has always complexed me and my limited understanding of an Income Statement. Thankfully, the Community is here for just these sort of inquiries.


I stumbled onto an old discussion between @Rustler and @john-pero about this very topic. Do either of you gentlemen have any insight to provide here?


Looking forward to hearing your thoughts on the matter!

Community Champion

Workflow Question Accrual Basis

I cut my teeth on Cash basis accounting. My history in agriculture with a current year crop paid over 3 plus years or currently rental properties where I certainly do not wish to pay tax on rent charged but never collected keeps me grounded in Cash. I do dabble in Accrual and essentially by using tenant invoicing as well as vendor billing I in fact use what the IRS refers to as a hybrid accounting model which is legal and perfectly acceptable.

With those caveats out of the way here is how I would approach your accrual based workflow.


1. you are posting income as it is billed and when it is billed, not when it is paid. The actual physical money in has absolutely nothing to do with your income - it is simply cashflow


2. In theory if your subscriptions to clients cross over your fiscal year you should charge each one by the month or split them up somehow since if for example I subscribe today for 12 months and pay you for 12 months but your year ends in 2 months you would record 2 months of billing this year and 10 months next year as well as sit on 10 months of unapplied payments which QBO has a horrendous time of handling but that is a ton of work and like I said it is in theory


3. Instead you would bill me for whatever I signed up for be it month to month or a year at a time and whether or when you get paid (or not) you post income based on face value of billing.


4. Refunds and chargebacks should not be posted to same income account as your subscriptions but to a separate expense or contra-income account. If you were not dealing with a third party payor whose 1099 has to be matched then a simple reduction of your single income account for all returns to account for reduction in cash received would be just fine but you would still record the return/refund within the fiscal year it happens and not for the year when first billed. This way your 1099 will match your billing and if ever audited or just closely examined your claimed gross income will be able to be matched to or exceed filed 1099s.


A refund/ return in fiscal 2020 would not in my opinion have an affect on fiscal 2019.  6 months after closing the books you are not going to open them back up to reduce what you have already reported although if it were a sizable amount an amended return might be feasible. 


I collect some rent through Square and at year end I get a 1099 from Square that represents 100% of what I billed my tenants but 0% of what Square deducted as their processing fees. I therefore report full payment and the 3.5%+/- is posted a separate expense. If a tenant pays on 12/31 but we have to give a refund on 1/2 the rent is included in the previous year 1099 and the refund in current year is not counted - exactly your situation



I know we have gone at it as to whether refunds/returns should be expense or as I prefer contra-income (keeps it above line)and if you ever had some type of assessment based on gross sales you would want the deduction "above the line" in my opinion.



Level 9

Workflow Question Accrual Basis

@john-pero Agreed 100%. Well said.
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