Wholesale chargebacks are a pain (if not a major cost burden) and can happen for a number of reasons. While the correct accounting treatment depends on the nature of the chargeback and the accounting principles followed by your company, there are some general guidelines below that you should consider when handling these:
Record wholesale chargebacks according to your business needs
Ultimately, you should consult your accounting professional or CPA to make sure the method you choose is sound for your business and agrees with your accounting policies, but you likely have some flexibility with how these are recorded. Some options include the following:
- Record as a negative to Revenue - This would likely be your “Returns and Discounts” revenue account, which actually is represented as a negative amount and reduces revenue in aggregate. While this reduces overall revenue, it doesn’t impact your COGS or Operating Expense (detailed below).
- Record to Cost of Goods Sold - You assume wholesale chargebacks are a natural part of your sales process and record this to a COGS account. While this doesn’t impact revenue, it does lower your gross profit and gross margin.
- Record to Expense - You see chargebacks as an operating expense, and tag these to a generic account or an account dedicated to chargebacks for better tracking. This removes them from revenue and gross margin calculations, but does still impact net income.
Consider creating an allowance for wholesale chargebacks
If meaningful chargebacks are expected based on historical data or contractual agreements with your large retail partners, you should consider creating an allowance for chargebacks on your financials. This allowance is essentially an estimated liability on the balance sheet to account for future chargebacks, and would be booked in the same month you record the revenue for which you expect the chargeback. This method is recommended if chargebacks are frequent and expected as routine operations (i.e. not a one-off).
The accounts involved in this method include: Allowance for Chargebacks (balance sheet), Chargeback Expense (expense on the income statement), and Accounts Receivable (balance sheet). This removes chargeback impact from revenue or COGS, and moves it to the balance sheet and operating expense on the income statement. For example, if you recorded $1,000,000 in sales in October 2023 and you assume 1% of that to be charged-back, you would record the following:
Then, as you started to incur chargebacks later on against those Oct sales, you would reduce the Allowance account, and credit AR (since you don’t expect to be fully paid on that invoice):
Most likely, wholesale chargebacks will take the form of a credit memo that you issue to your customer saying, “You no longer have to pay this amount on that invoice I sent you.” In effect, that reduces the amount owed to you via the customer invoice you sent them previously as part of that shipment. You should ensure that credit memos are associated with the relevant invoice in your billing system so you can trace the chargeback back to the correct period and customer purchase.
Analysis & Reporting
It’s critical to be able to track and report on wholesale chargebacks so you can get a sense of how well your shipping and fulfillment teams are operating. Wholesale chargebacks can range from 1%-10% of total B2B sales, so it’s important to be able to see a pattern emerging and get ahead of it.
We recommend ensuring you have data capabilities that allow you to see chargebacks by customer, fulfillment method, merchandise category, and region, to see where you might need to get better at complying with your customers requirements. We also recommend checking out our wholesale chargebacks product (aptly named Chargebacks) to see how Convictional can help you reduce your chargebacks and keep more of your sales!
Please note that the above is for informational purposes only. You should consult your CPA to determine the proper accounting practices for your business
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