Credit Issuance
Overview
When customers return a product or cancel ongoing service, instead of issuing cash refunds, merchant may keep the cash and issue credits to the customer for future payments.
Journal entries can be created on Leapfin Platform for all credit issuance, regardless of whether the credit is issued for a single purchase or an ongoing subscription.
Configuration
Required parameters
| Fields | Description |
|---|---|
issue_date | calendar date of when the credit is issued to customer |
issue_amount | amount of credit issued to customer |
Required accounts
| Accounts | Description |
|---|---|
revenue_account | asset account representing revenue. e.g. "Revenue" |
credit_liability_account | liability account representing debt owed to customers. e.g. "Credit Liability", "Unearned Revenue" |
cash_account | cash or cash equivalent account, e.g. "Cash", "Account Receivable" |
Optional parameters & accounts
| Fields | Description |
|---|---|
service_start_date | calendar date of when the subscription period begins. The date is include in the subscription period. |
service_end_date | calendar date of when the subscription period ends. The date is include in the subscription period. |
deferred_revenue_account | liability account represent the deferred revenue. e.g. "Deferred Revenue". |
Walkthrough 1: Single Purchase
Customer John purchased a chair on Amazon on Jan 1st for $30. He then decided to return it as Amazon credit on Jan 15th.
Event 1: item is purchased
When the chair is purchased on Jan 1st, the following journal entry is created. (Assuming the payment is made immediately upon purchase)
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 01/01/2022 | Cash | 30 | |
| Revenue | 30 |
Event 2: credit is issued
On Jan 15th (issue_date), when John returned the chair for $30 Amazon credit (issue_amount), the following journal entry is created.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 01/15/2022 | Revenue | 30 | |
| Credit Liability | 30 |
Walkthrough 2: Subscription
Customer Kerry subscribed Amazon prime for $14.99/month. Her billing cycle was 10th of each month. She decided to cancel the service on Feb 19th and receive Amazon credit for the remaining period until her next billing cycle.
Event 1: item is purchased
When the subscription is renewed on Feb 10th (service_start_date), the following journal entry is created. (Assuming the payment is made immediately upon purchase)
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 02/10/2022 | Cash | 14.99 | |
| Deferred Revenue | 14.99 |
Besides, a series of amortization journal entries will be created to recognize revenue on a daily basis. The amortization journal entries cover the subscription cycle from Feb 10th (service_start_date) to Mar 9th (service_end_date).
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 02/10/2022 | Deferred Revenue | 0.53 | |
| Revenue | 0.53 | ||
| 02/11/2022 | Deferred Revenue | 0.53 | |
| Revenue | 0.53 | ||
| ... | |||
| 03/09/2022 | Deferred Revenue | 0.53 | |
| Revenue | 0.53 |
The daily amount is calculated by $14.99 / (number of days between 02/10/2022 and 03/09/2022) = $0.53
Read here about the rounding treatment for sub-cent amounts.
Event 2: credit is issued
On Feb 19th (issue_date), when Kerry canceled the subscription and received $9.64 Amazon credit (issue_amount) for the remaining unused period (i.e. Feb 11th to Mar 9th), the following journal entry is created.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 02/19/2022 | Revenue | 9.64 | |
| Credit Liability | 9.64 |
In addition, the recognition schedule of the original subscription item is adjusted.
Data Requirement for Subscription Adjustment
The recognition schedule adjustment explained below is applicable only if the issued credit specifies which original subscription is being cancelled. Sometimes, such link between applied credits and original subscription is not stored in data.
Specifically, the remaining balance of deferred revenue as of Feb 19th (issue_date) is recognized immediately as revenue.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 02/19/2022 | Deferred Revenue | 9.69 | |
| Revenue | 9.69 |
The remaining balance of deferred revenue is calculated by summing up all journal entries on and prior to Feb 19th (
issue_date). Specifically,
- balance = $14.99 (cr on 2/10) - $0.53 (dr on 2/10) - $0.53 (dr on 2/11) - ... - $0.53 (dr on 2/19) = $9.69
Note that the calculated balance $9.69 is a few cents different from the $9.64 credit amount (
issue_amount) issued by Amazon. This is because different sub-cent rounding logics are applied by Leapfin and Amazon.Such difference does not impact you financial statements accuracy, because the net net revenue booked by Leapfin is consistent with the data from Amazon.
The future recognition schedule post Feb 19th (issue_date) is cancelled out by creating a series of reversal daily journal entries.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 02/20/2022 | Revenue | 0.53 | |
| Deferred Revenue | 0.53 | ||
| 02/21/2022 | Revenue | 0.53 | |
| Deferred Revenue | 0.53 | ||
| ... | |||
| 03/09/2022 | Revenue | 0.53 | |
| Deferred Revenue | 0.53 |
Updated 6 months ago