Easy Accounting Tips for Chargebacks

In this blog, we're going to break down everything about chargeback accounting in a way that's easy to understand. We'll cover everything from the basics of accounting for chargebacks to how to predict and prepare for them. So, let's get started!
by Ronen Shnidman
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Published: January 10, 2024
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Easy Accounting Tips for Chargebacks

If you're a business owner who accepts credit cards, you've probably faced the headache of chargebacks before. They're more than just fund reversals - they can really affect how you keep track of your money. In this blog, we're going to break down everything about chargeback accounting in a way that's easy to understand. We'll cover everything from the basics of accounting for chargebacks to how to predict and prepare for them. So, let's get started!

The Basics of Chargeback Accounting

Simply put, a chargeback happens when a customer disputes a credit or debit card transaction, and the amount spent is returned to their account. This can occur for various reasons, like unauthorized credit card use or dissatisfaction with a purchase.

You need to record these chargebacks accurately. Why? Because they directly affect your revenue and expenses. When a chargeback occurs, you lose the sale amount and might also face additional fees from the bank. This means you need to adjust your financial records to show the decrease in revenue and the additional costs.

Keeping track of chargebacks helps you understand how often they happen and why. This can be a valuable tool in spotting trends or issues in your business processes, like problems with your product or service or even identifying fraud.

How Do Chargebacks Affect Accounting?

When a customer initiates a chargeback, the transaction you once counted as revenue gets reversed. This isn't just about losing a sale. It's an issue that requires careful financial adjustment.

In your accounting records, you'll need to reduce your revenue by the amount of the chargeback. This ensures your financial statements remain accurate.

But there's more. Chargebacks often come with fees from your payment processor. These fees should be recorded as expenses, which means they reduce your overall profit. If you're seeing a lot of chargebacks, these fees can add up and significantly impact your bottom line.

Also, dealing with chargebacks takes time and effort. Disputing or accepting chargebacks involves administrative work, and this indirect cost should also be considered. Remember, effective chargeback management is a key part of maintaining accurate and reliable financial records.

Understanding the Chargeback Process

As we've mentioned before, a chargeback happens when a customer disputes a charge from your business and asks their bank to reverse it.

When a chargeback is requested, you'll be notified. The bank temporarily removes the funds from your account until the dispute is resolved. It's your chance to present evidence that the transaction was valid. If you can't prove this, the chargeback becomes permanent, and the funds are returned to the customer.

Reducing chargebacks usually requires having clear transaction records to pinpoint the cause(s) behind your chargebacks, like customer service or order fulfillment problems. If you're having trouble keeping track of your chargebacks, bringing in an accounting firm to help could be a smart move.

How to Document Initial Chargebacks in Financial Records?

Documenting chargebacks in your financial records is a step-by-step process. Follow the steps we've provided below.

  • Identify the transaction: When you receive a chargeback, first identify the original transaction in your records. Note the date, amount, and any associated fees.
  • Adjust your revenue: Reduce your revenue in your accounting records by the chargeback amount. This keeps your income statements accurate.
  • Record associated fees: If there are fees associated with the chargeback, record them as expenses. These fees lower your net income and should be tracked for financial analysis.
  • Update your inventory (if applicable): If the chargeback involves a physical product, adjust your inventory accordingly. This ensures your inventory records remain accurate.
  • Maintain detailed records: Keep detailed records of chargebacks, including any communication with the customer or bank. This information can be crucial for disputes or future reference.
  • Review regularly: Check your chargebacks to identify patterns or frequent issues. This can help improve business processes and reduce future chargebacks.

The Role of Reversals in Chargeback Accounting

A chargeback reversal is what happens when a chargeback is overturned in favor of your business. This occurs if you successfully dispute a chargeback, providing sufficient evidence that the transaction was valid and should be upheld.

Here's how reversals impact your accounting.

  • Restoring revenue: When a reversal occurs, the funds initially taken out of your account due to the chargeback are returned. The revenue that was deducted when the chargeback was made is now restored, correcting your income statements.
  • Adjusting expenses: If your bank or payment processor charged you fees for the initial chargeback, sometimes these might also be reversed. In those cases, that means reducing the costs you recorded for the chargeback fees.
  • Inventory management: If the chargeback involved the return of a physical product, and you adjusted your inventory for the return, you need to revert that change. The reversal confirms that the sale was valid, so the inventory adjustment made earlier should be nullified.

Understanding Arbitration in the Chargeback Process

Arbitration occurs when there's a disagreement between the merchant and the cardholder's issuer that can't be resolved easily. It happens after the initial dispute and chargeback, and it involves the card network (like Visa or MasterCard) stepping in to make a final decision.

Arbitration is almost always a last resort. It's used when all other attempts to settle the chargeback have failed. During arbitration, both you and your customer present your evidence to the card network. They review everything and then make a binding decision. This decision is the final step in the chargeback process.

Arbitration can be costly and time-consuming, so it's usually best to resolve chargebacks before reaching this stage. However, in some cases, contesting a chargeback you feel is unjustified might be your only option.

How to Record Transactions in Case of Arbitration?

If a chargeback dispute goes into arbitration, here's what you should do.

  • Track the dispute: Keep detailed records of the dispute, including dates and any communication. This helps in understanding the timeline of events.
  • Record the arbitration cost: If any fees are associated with the arbitration, record them as expenses. This might include costs charged by the card network for handling the arbitration.
  • Adjust revenue if necessary: If the arbitration decision is against you, and the chargeback stands, ensure your revenue reflects this. You would keep the revenue reduced as it was after the initial chargeback.
  • Restore revenue if you win: If the arbitration is in your favor, reverse the chargeback in your records. This means increasing your revenue to reflect the returned funds.
  • Update expenses for reversed fees: If any fees charged for the chargeback are returned to you, adjust your expenses accordingly.
  • Finalize the record: Once arbitration is complete, update your financial records to reflect the final outcome. You need to be sure they accurately represent your business's financial status.

Forecasting Recovered Chargeback Revenue

Forecasting chargeback revenue is about estimating how much money you'll get back if you successfully finish the process and win chargeback reversals. It helps in planning your finances and understanding their impact on your business.

To forecast recovered chargeback revenue, look at your past chargeback cases. How many did you win? How much money was involved? Use this information to estimate future recoveries.

For example, if you've historically won half of your chargeback disputes, you might estimate recovering half of the total amount disputed in the future. This kind of forecasting gives you insights into the effectiveness of your customer service and dispute resolution processes.

Are there areas you can improve to win more disputes? Can you implement better fraud prevention measures? These questions are essential for reducing chargebacks and increasing your recovery rates.

Calculating Expected Win and Recovery Percentages

Calculating expected win and recovery percentages involves analyzing your past dispute outcomes to predict future success rates.

To calculate these percentages, divide the number of disputes you've won by the total number of disputes. Then, multiply by 100 to get a percentage.

Here's a practical example: Say you had 100 chargeback disputes last year and won 40 of them. To find out your win rate, you divide the 40 disputes you won by the 100 disputes you had in total. This gives you 0.4. To turn that into a percentage, you multiply by 100. After doing the math, you discover your win rate is 40%. This means you won 40% of your chargeback disputes in the past year.

For recovery percentages, consider the amount of money involved in each dispute. If you win larger disputes more often, your recovery percentage might be higher than your win percentage.
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How to Include Chargeback Projections in Financial Forecasts?

To include chargeback projections in your financial forecasts, follow these simple steps.

  • Analyze past data: Look at your previous chargeback history. How many chargebacks did you have, and what was their total value?
  • Identify patterns: Notice any trends in your chargebacks. Do they happen more during certain times of the year or with specific products?
  • Estimate future chargebacks: Based on your past data and identified patterns, calculate how many chargebacks you might have in the future and their potential value.
  • Include chargebacks in revenue projections: When projecting your future revenue, subtract the estimated value of future chargebacks. This gives you a more accurate picture of your expected income.
  • Consider recovery rates: If you usually win some chargebacks, adjust your revenue projections to include this recovered money.
  • Review regularly: Update your chargeback projections as you get more data. This keeps your financial forecasts accurate and reliable.

Final Thoughts

As we wrap up, remember that managing chargebacks is an integral part of running a successful business that accepts credit cards.

Always keep a close eye on your transactions, dispute chargebacks when necessary, and learn from each case to prevent future occurrences. Embrace these challenges as opportunities to refine your business practices and enhance customer satisfaction.

With the right approach and solid management, you can turn potential setbacks into stepping stones for your business's growth and success. We wish you the best of luck!


This article has been written by Profitwise.

Written by
Ronen Shnidman
Ex-journalist and major fan of fintech and OSINT, I write regularly for leading industry outlets in finance and fraud prevention. Outlets I contribute to include Payments Dive, Finextra, and Merchant Fraud Journal, and I have been cited by PYMNTS.com
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