Best Ecommerce Accounting Practice on Recording Refunds and Returns
Being part of the ecommerce accounting ecosystem, the busy season for accounting and finance professionals starts after the holiday sales. With hundreds and thousands of transactions coming in during the holiday sales, we also anticipate a large volume of returns from the customers. As return transactions flow in, what’s the best way to capture the return data and what should we look out for?
What’s considered a refund versus a return in ecommerce accounting?
- A return is when a customer sends back (or returns) an item to the store or the warehouse.
- A refund is when a customer receives part or all of their money back - or when the brand refunds a customer’s payment.
- Depending on the company’s policy, a customer may need to return an item before their money is refunded.
What’s the main challenge in recording refunds or returns in ecommerce
- There are some companies where you can’t (or shouldn’t) return a product - this is typically true in verticals such as beauty and food and beverage. In these cases, the company is primarily concerned with refunds since they are not accepting returned products.
- Companies that can accept returned goods such as clothing want to ensure they’re receiving the product and adding it back into inventory so they can eventually sell it.
- The challenge for companies accepting returned goods is to make sure there is a clear process between accepting the return and then refunding the customer. The worst-case scenario would be refunding a customer and never receiving the goods back into inventory. [There are some great return programs out there to help facilitate the customer service and operations component such as Loop.ai and Happy Returns.]
How should Refunds or Returns be recorded to be in compliance with GAAP?
- Every company’s setup and refund policy is different and we recommend working directly with your auditors. We find this article from PWC to be a helpful starting point.
- What we typically see are companies creating a contra revenue account - sales returns and allowances. Companies will book the full amount of sales and then based on historical performance will book a refund amount based on the expected value of refunds.
How does Blue Onion help to make this process easier?
- Refunds in Blue Onion are matched back to their original order. Finance and accounting teams can use this data to estimate a company’s expected refunds, see how many days on average between an order and a refund, and have better visibility into how refunds are impacting cash flow.
- For those companies that use third-party refund and return applications, we can help simplify their accounting impact, specifically around fully discounted orders, exchange transactions, and gift cards.
Disclaimer: The information provided in this article is intended as general guidance only and is not intended to be nor should it be considered legal or financial advice. You should consult with your CPA to review your business' specific accounting issues and challenges.