From time to time, we refund customers for the product returned/cancelled. There are occassions that the refund amount is more than the original revenue, due to distributor mark-up, or the arrangement with the customer originally to persuade them switching to our product. The difference between refund and original revenue, where should it get booked? Will it be COS (as this is product issue), or it is a
What if customer refund is more than the original revenue
Answers
I would say Sales - Refunds (contra-revenue) account. The CGS is the CGS.
Thus the Net Revenue would show a loss.
I agree with Wayne that it should hit top-line revenue via a contra account. This allows you to capture and track refunds over time and as a percent of sales.
If the refund is within the current year, and you are able to determine the exact details of the original recognition, I would reverse the portion of the original transaction to the originating GL accounts, with the additional overages due to changes in discounts and incentives to post to the accounts where you record those special incentives. The account you use might be discounts, however if you have an industry specific type of arrangement I would also look to how your industry normally records those "extra refunds".
Why would I reverse to the originating accounts? Because I would not want these reversals to impact my revenue history or analysis throughout the year. Why would I want to create a special incentives refund account? So these reversals that lead to cash outflow in excess of revenue can be analyzed. I would want to analyze in greater details the activities of sales people that result in cash out the door that is greater than their sales. Commissions will need to be adjusted for this, greater than the commissions base of calculation.
If you do not separately analyze this activity commissions could be skewed, it could get out of control, this may highlight where sales people are getting some kind of illegal kickback. While no one wants to talk about fraud, it is common in the sales arena and you need to analyze where there is potential.
Where you have these situations, be sure you sales people are not "channel stuffing" at quarter end or year end, whereby they deliver more goods than ordered in order to obtain higher commissions, only to have your firm have to pay a penalty in higher refunds.
Figure out what is going on operationally before you decide the
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