Refund Handling
Overview
When a product or service is purchased from a company by a user, there can be cases where a refund is made, whether fully or partially. Journal entries are needed to mark the transfer of cash flow in the appropriate accounts.
Configuration
Required parameters
| Fields | Description |
|---|---|
refund_date | the calendar date of when the refund transaction |
refund_amount | amount of the refund transaction |
Required accounts
| Account | Description |
|---|---|
revenue_account | asset account representing revenue. e.g. "Revenue" |
cash_account | cash or cash equivalent account, e.g. "Cash", "Account Receivable" |
Optional parameters & accounts
| Fields | Description |
|---|---|
service_start_date | the calendar date of when the subscription period begins. The date is included in the subscription period. |
service_end_date | the calendar date of when the subscription period ends. The date is included in the subscription period. |
deferred_revenue_account | liability account represent the deferred revenue. e.g. "Deferred Revenue". |
Walkthrough 1: Standalone Refund
For example, let's say John purchases a DLC pack for his favorite Playstation game. He pays $70 via his credit card on 01/01/2022. But later the same day, he wants to refund the DLC pack because he changed his mind.
Event 1: Payment is Made
When the payment is made on the same day, the Revenue account is credited the full amount of the purchase, and the asset account for cash is debited.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 01/01/2022 | Cash | $70 | |
| Revenue | $70 |
Event 2: Refund is Made
When an exact refund is made on refund_date (the same day of the payment), credit the amount from the cash account, and debit the respective value that is recognized.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 01/01/2022 | Revenue | $70 | |
| Cash | $70 |
Walkthrough 2: Subscription Refund
For example, let's say John buys a $31 subscription for a premium version of Netflix for the month of January. But midway through the subscription, he changes his mind and would like to be refunded the money.
Event 1: Payment is Made
When the subscription is bought by the user, the following journal entry is made on the date of the invoice issued, Jan 1st.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 01/01/2022 | Accounts Receivable | $31 | |
| Deferred Revenue | $31 |
When the payment is made on the same day, there is no more collection needed so the Accounts Receivable account is credited the full amount of the purchase, and the asset account for cash is debited.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 01/01/2022 | Cash | $31 | |
| Accounts Receivable | $31 |
Daily Amount
The daily amount is calculated by $31 / (number of days between 01/01/2022 and 01/31/2022) = $1
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 Jan 1st (service_start_date) to Jan 31st (service_end_date).
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 01/01/2022 | Deferred Revenue | 1 | |
| Revenue | 1 | ||
| 01/02/2022 | Deferred Revenue | 1 | |
| Revenue | 1 | ||
| ... | |||
| 01/31/2022 | Deferred Revenue | 1 | |
| Revenue | 1 |
Event 2: Refund is issued
Let's say a refund, for the full amount of the subscription, is made on the 15th of January.
On the date of the refund issued (refund_date), Jan 15th, an immediate Journal Entry is made to take out the refund_amount from the Cash account.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 01/15/2022 | Revenue | $31 | |
| Cash | $31 |
Specifically, the remaining balance of deferred revenue as of Jan 15th (on refund_date) is recognized immediately as revenue.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 01/15/2022 | Deferred Revenue | $16 | |
| Revenue | $16 |
The remaining balance of deferred revenue is calculated by summing up all journal entries on and after Jan 15th (
refund_date). Specifically,
- balance = $31.00 (cr on 1/31) - $31.00 (dr on 1/31) - $1.00 (dr on 1/30) - ... - $1.00 (dr on 1/15) = $16
The future recognition schedule post-Jan 15th (on refund_date) is canceled out by creating a series of reversal daily journal entries.
| Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
| 01/01/2022 | Revenue | 1 | |
| Deferred Revenue | 1 | ||
| 01/02/2022 | Revenue | 1 | |
| Deferred Revenue | 1 | ||
| ... | |||
| 01/31/2022 | Revenue | 1 | |
| Deferred Revenue | 1 |
Updated 6 months ago