Accounting for Chargeback
Chargeback is the reversal credit card transaction in which the customer requests the bank to return the payment. It is the protection program that allows the card owner to reverse unauthorized transactions. It prevents the merchandise from committing fraud or dishonest transactions.
Chargeback happens when the customer contacts the bank to reverse the purchase transaction. If they have valid reasons, the bank will reverse the sale and transfer seller’s balance to customer. The bank will deduct seller’s balance and add it back to customer’s balance.
It is simply the sale return that customer returns the goods and asks for a refund, but the process is made through bank. The seller can dispute back to the bank if the customers do not return the goods or any other reasons. If the merchant believes that there is a mistake in a chargeback, they can contact the bank and dispute back.
Chargeback journal entry
When the customers contact the bank for chargeback and return the goods, the bank will process chargeback. In the end, cash is deducted from seller accounts and the credit to the cardholder. If the seller agrees with chargeback, they need to make the following entry.
The company makes journal entry by debiting revenue and credit cash. Revenue will be deducted as the customers have already canceled the purchase. Cash need to credit as bank already deduct the amount from account.
| Account | Debit | Credit |
|---|---|---|
| Revenue | 000 | |
| Cash | 000 |
During chargeback, customer also requires the return of the goods to reverse the purchase. So the company needs to reflect this transaction by debiting inventory and credit cost of goods sold.
| Account | Debit | Credit |
|---|---|---|
| Inventory | 000 | |
| Cost of Goods Sold | 000 |
Chargeback Example
Company ABC sells the book online and gets paid by using a Visa card. On 01 Jan 202X, one customer purchase books for $ 100 and settle by using a credit card. ABC process the sale and make a record to reflect the transaction. The cost of goods sold is $ 60 and the company makes a gross profit of $ 40.
However, one week later, the customer contact the bank to chargeback the transaction as the credit card was lost. The cardholder claims that it is not her purchase, and she agrees to return the books to ABC. After the process, bank agrees to chargeback the transaction, and the buyer returns the books.
Company ABC needs to make the following journal entry:
We need to record debit revenue and credit cash $ 100. This journal will reduce cash as the bank already chargeback. At the same time it will deduct revenue as the customer cancel the transaction.
| Account | Debit | Credit |
|---|---|---|
| Revenue | 100 | |
| Cash | 100 |
When the customer returns the books, ABC needs to debit inventory and credit the cost of goods sold. This journal entry will record inventory as the book arrived. It also removes the cost of goods sold as the books are not sold now.
| Account | Debit | Credit |
|---|---|---|
| Inventory | 60 | |
| Cost of Goods Sold | 60 |
Accounting for Chargeback – buyer
For the buyer, the chargeback is the transaction that happens when the company’s card is charged without proper authorization. The buyer may not happy with the purchase and cannot negotiate with the seller due to various reasons. So they end up dispute to charge the transaction. It seems like the last option is to reverse back the transaction while the seller does not agree to refund.
The chargeback journal entry for the buyer is the reverse of original transaction. Initially, the company record assets or expense when the company purchased the goods or service. However, the goods or service’s quality is not up to the standard so it leads to chargeback.
The company needs to make journal entry by debiting cash at bank and credit assets or expenses. It is the reversing entry that is opposite from the original transaction.
| Account | Debit | Credit |
|---|---|---|
| Cash at bank | 000 | |
| Expense/Assets | 000 |
The cash at bank will be increased which reflects the chargeback that bank transfers to the company’s account. The expense will be credited from the income statement as the service or goods are not qualified for the company. If the company receive the goods and record as assets on balance sheet, we need to credit them back as we need to return the items.
Moreover, the company balance may be charged without proper authorization. It means the supplier charge buyer’s balance without their authorization. It is considered fraud, the company only realizes the transaction when obtaining the bank statement.
When the company saw the cash transfer in the bank statement, the company will contact the bank and request for a dispute. At the same time, the company needs to record the transaction to reflect the cash movement. They simply debit suspense accounts and credit cash at bank.
| Account | Debit | Credit |
|---|---|---|
| Suspense Account | 000 | |
| Cash at Bank | 000 |
Cash will be credited to reflect the cash movement in bank statement while the suspense account is a temporary account. The company uses a suspense account to record uncertain transactions which expect to reclass into a different account in the future.
The company will contact the bank to dispute the unknown transaction. After the chargeback is complete, the bank will transfer the money back to the company’s account. So the company will make journal entry by debiting cash at bank and credit suspense account
| Account | Debit | Credit |
|---|---|---|
| Cash at Bank | 000 | |
| Suspense Account | 000 |
Chargeback Example for Buyer
XYZ is a service company that works with many big clients overseas. Management has used credit cards for small purchases. At the end of the month, the accountant will export the bank statement and reconcile it with the book balance.
On 31 Oct 202X, during reconciliation, accountant found one suspicious transaction. They were charged $ 500 from an overseas supplier which they are not familiar. The accountant has discussed with management and they decide to dispute the transaction with the bank.
After checking, the bank says that it is a fraud scheme run by overseas company. They try to steal credit card numbers and process fake purchases to steal the money. The bank will chargeback the transaction, but they need some time to process.
On 15 Nov 202X, the chargeback is completed, the bank has transferred the money back to XYZ. Accountants need to reflect the transaction in their recording.
Solution:
On 31 Oct 202X, XYZ needs to record debit suspense account, and credit cash at bank $ 500.
| Account | Debit | Credit |
|---|---|---|
| Suspense Account | 500 | |
| Cash at Bank | 500 |
Company needs to record credit cash as the transaction is already reflected in the bank statement. However, they are not sure about the transaction, so accountants use the suspense account to record on the debit side. It is the account in balance sheet that use to keep temporary transactions that will be reclassed later.
On 15 Nov 202X, the chargeback process is completed, company receives the amount. The company needs to reverse back the transaction by debiting cash at bank and credit suspense account.
| Account | Debit | Credit |
|---|---|---|
| Cash at Bank | 500 | |
| Suspense Account | 500 |
It is the reverse back of the original record, the balance moves from the suspense account to cash which is reflected with bank statement. It will not impact the income statement.
Chargeback period
Chargeback Period is the time that cardholders can request to dispute the transaction with the seller. The card issuer usually sets a proper time frame to allow the user to chargeback the transaction in case something goes wrong. They will not accept any dispute that incurs beyond the chargeback period. It will help to reduce the workload for the company. It is also easy for the employee to solve the dispute as it just happen.
It does not make sense when the cardholder requests a dispute over the transaction which happen 5 or 10 years ago. It is almost impossible for the card issuer to investigate the issue. They will find it very hard to contact the seller and find the proof of transaction. It also has a negative impact on the legitimate merchant to prove their transactions.
In order to prevent such an issue, the card issuer will set the chargeback period which is different from one company to another. Most of the company allow the customer to chargeback within 120 days. It is considered a proper period to protect the customers and prevent the complicated process as mentioned above. Cardholders must request for dispute when they realize the unknown purchase.
Chargeback vs Refund
Refund is the process that buyers negotiates with sellers regarding the purchase of goods or service to get their money back. The buyers may not happy with the purchase due to poor quality, damage, or later delivery. So they simply want the money back and return the goods.
Most of the sellers will include refund policy as their terms and condition to boost customer confidence. They will check the product quality and refund back base on their term and condition.
Some companies even refund the customers without any question ask as long as the customer want. They want to show that customers will happy with goods or services.