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Chargeback Accounting

chargeback accounting

Why Chargeback Accounting Can be a Real Bookkeeping Nightmare

Chargeback accounting can refer to how bookkeepers record any type of charged-back transaction. The term is most commonly used, though, in reference to consumer credit card chargebacks.

You have many reasons to avoid a chargeback. The process is time consuming, difficult to understand, skewed in favor of the cardholder, and expensive…but the complications don’t end there. Accurately accounting for chargebacks can be a nightmare, but it’s essential for identifying and tracking the true cost and impact on your business.

What is a Chargeback?

In simple terms, chargebacks are forced reversals of a credit card transaction. They’re one aspect of a federally-mandated protection program for consumers who are the victims of fraud or dishonest merchants.

Cardholders who have an issue that cannot be resolved with the merchant can contact their issuing bank and request a chargeback, officially disputing the dollar amount of the transaction. If the chargeback is deemed valid, funds are removed from your account and returned to the cardholder. In some cases, you may be allowed to challenge a chargeback, which can also affect recordkeeping.

How chargeback accounting is handled will vary based on the bank, the processor, and/or the card network. The members of your accounting team will not only need to understand how the various entities work with each other, they’ll also need to consistently check for updates on each one’s requirements.

What Makes Chargeback Accounting so Challenging?

Let’s be honest: any accounting can seem challenging to a non-accountant. Chargeback accounting is just one more facet, albeit one with its own unique set of speedbumps. Even if you use a professional accounting team, it’s still important to understand some of the extra complications that come with chargebacks:

Chargebacks are irregular

Chargebacks are irregular

Unlike checks or deposits, you won’t typically deal with a set number of chargebacks on a weekly basis. Having fewer chargebacks is a good thing, of course, but it increases the odds that you’ll forget how you recorded the last one you received. That makes it easier to improperly document disputes, leading to inaccuracies that pop up when you go to settle your books.
The chargeback dispute process takes time

The chargeback dispute process takes time

Contesting an invalid chargeback can take weeks or months. The chargeback process could take funds from your account in May, but the claim may not be resolved until July…or even later. Cases can even extend across fiscal years. That means you’re constantly juggling different payable amounts across inconsistent time frames, without even knowing if you’ll actually win the case and retrieve the funds.
There are multiple expenses to track

There are multiple expenses to track

Legitimate or not, each chargeback comes with a fee. That means you’ll have to document at least two transactions, in two different places. And that doesn’t count all the other expenses associated with chargebacks, like replacement of lost merchandise, shipping costs, legal and administrative fees, and dispute resolution.

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So, What Goes Where?

The most complicated aspect of the chargeback accounting is the number of variables involved. It’s nearly impossible to provide a comprehensive overview of the process because your bank, your processor, and even your accounting software all handle things slightly differently.

For example, where should you enter the chargeback itself? That may seem straightforward at first. After all, even if you decide to fight the chargeback, there are only two potential outcomes: you’ll either achieve a reversal, or you won’t. It’s not as easy as it sounds, though.

If you decide not to dispute, you’re automatically giving up the transaction amount. That doesn’t mean, however, that you should post those funds under “Cost of Goods Sold.” A chargeback is not a refund, so counting it as one will make your financial reporting inaccurate. Instead, you should write it off as a “Bad Debt” expense.

If you believe you can prove the chargeback is invalid and intend to dispute it, you’ll want to log the initial transaction amount to Accounts Receivable. Preferably, you should do this in a separate account designated for funds owed to you and that you hope to recover. If you win the representment, the transaction amount would simply be applied against your Accounts Receivable that was set up specifically for the chargeback. If the chargeback is ruled valid, however, the Accounts Receivable balance would need to be written off to Bad Debt Expense.

That’s a bit complex already…but wait: there’s more.

The Impact of Your Merchant Account

As with all bookkeeping, you can’t expect accurate reports in your chargeback accounting if you don’t have accurate input. Where and how your chargeback information is displayed when it comes to you, however, may vary based on where you have your merchant account.

National or global banks like Chase or Bank of America are more likely to list chargebacks as separate line items on your monthly statement. Banks know it’s in their best interest to make this information clear and easy to find. This will make reconciling your statements easier, as well.

If you’re a smaller merchant, or one that has been labeled “high-risk,” you’re more likely to employ a third-party solution such as Square, Cayan, or PaySimple. But, even with reputable providers, you’re less likely to find a single consistent practice when it comes to displaying chargebacks. Because these smaller providers generally deal with fewer specifics overall, they may lump chargebacks and expenses into a single transaction on your statement.

That means it will fall on you or your accountants to correctly identify the particular chargebacks included in that lump sum. This may involve contacting the provider directly to get a more detailed breakdown. Or, transaction amounts, reversals, and fees may be recorded as separate amounts. This makes it easier for individual items to fall through the cracks during chargeback accounting.

When it comes time to trace expenses back to their originating transactions, you may also find that certain providers set aside chargeback-related fees in a reserve fund. In these cases, your bank will release those monies to you only after a set time (usually months). The account reserve could be a revolving factor, meaning there’s always a segment of your money that you can’t touch.

Chargeback Accounting

The 2021 Chargeback Field Report

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Now, there’s just one more complication to consider: the actual chargeback fee.

Whether or not you win a chargeback dispute is a moot point when it comes to chargeback fees. These charges will be levied against you in either case. Treat them as operating expenses (bank fees) unless for some reason your business receives a high volume of chargebacks. In that case, it may be easier to set up a separate sub-account for chargeback-related fees.

That account could also be used for recording any expenses related to disputing the chargeback. It’s important to monitor dispute fees along with other chargeback-related costs to make sure you’re getting a good ROI on your representments.

Here’s a Better Idea: Prevention

Chargeback accounting isn’t impossible. However, accounting for chargebacks will lead to some serious headaches. The best way to reduce the stress associated with chargeback accounting is to prevent them from happening in the first place.

Unfortunately, there’s no definitive combination of tactics that will work for comprehensive prevention in every situation. That said, it is possible to create a customized plan that successfully addresses your particular situation.

Chargebacks911® offers an unparalleled understanding of emerging threats coupled with real-world merchant experience. This enables us to create the most dynamic, most effective risk mitigation solutions on today’s market, all backed by the only performance-based ROI guarantee in the industry.

Chargeback accounting doesn’t have to mean regular monthly migraines. Contact Chargebacks911 today for a free ROI analysis. We’ll show you how much you stand to gain by optimizing this last essential layer of fraud management.

Prevent Chargebacks.

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