Author: Tom-Chris Emewulu
Digital Evangelist

Chargeback accounting involves essential best practices and ways to gather and compile relevant data and documents related to dispute chargebacks.

Chargeback impact on eCommerce businesses has been discussed extensively in the industry. One chargeback creates a hysteric ripple effect on every part of a business.

But what hasn’t received equal airtime is accounting for chargebacks – how to track and record the overall cost of your disputes.

In this piece, we excavate all the best practices and insights to help you create effective chargeback bookkeeping. And remove the headache from dispute-related financial reporting.

But before we dig in, let’s clarify the basic concept.

What Is Chargeback Accounting?

Chargeback accounting involves every procedure a business uses to track and report transaction disputes with other business activities in its financial records.

For accurate chargeback accounting, the bookkeeper must make room for both chargeback, reversals, and ancillary fees. These unpredictable costs can stretch into different accounting periods.

The bookkeeper must also remember that various banks and processors have different methods for handling chargebacks.

These complexities often make accounting for chargebacks a nightmare for businesses. Plus, chargeback accounting demands real-time reporting and post-dispute activities such as installing chargeback analytics and diagnostics.

So you can’t just assume that anyone who can crunch numbers and analyze data will readily handle the work with ease. The handler needs more in-depth knowledge of the chargeback process.

That’s especially true for vendors that get frequent payment disputes. A thorough knowledge of the chargeback process and how to account for every moving part is crucial.

Whe Accurate Chargeback Accounting is Vital for Business Sustainability

Chargeback represents a growing business sustainability risk. If you don’t have a reliable system to track dispute-related losses, you should consider establishing such a system immediately.

Without proper chargeback accounting, you might not readily grasp the impact on your business' bottom line.

Accounting for chargeback helps you measure and improve your dispute mediation efforts to ensure operational efficiency and long-term risk management. Yet, your merchant account type often determines the accuracy of your chargeback reports.

For example, reconciling accounting information with big banks is pretty straightforward. They categorize chargebacks as individual line items on your monthly financial statement – separating the transaction amount and the chargeback fee accordingly. The same is true for chargeback reversals.

But third-party merchant account providers merge chargebacks and ancillary costs into one transaction on your statement. The onus is on you to adequately isolate the actual chargeback amounts.

And since that's information you might not readily have, some transactions could go unrecorded, resulting in incorrect accounting logs.

Sometimes, your provider might hold a specific amount of your revenue in a merchant account reserve to cushion potential risks. The funds are only made available for use at the end of the risk period, usually up to six months. Even at that, a portion of your revenue is unavailable as the account reserve might be rotational.

If you don’t have proper chargeback accounting, it’ll be hard to understand how much working capital you have. More so, you won’t know the extent of your dispute liabilities or losses, which means forecasting future revenues will also be challenging.

With all that said, below are three solid ways to make your chargeback accounting more effective.

ecommerce fraud keeps rising

3 Ways to Simplify Your Chargeback Accounting

You already know that you should not record chargebacks as the cost of sales. The terminologies are straightforward: Chargeback isn’t synonymous with refund.

The challenge often lies in excavating the input data, understanding how many chargebacks you have, and being up to date with your chargeback situation.  

Here are some ideas to simplify your chargeback accounting.

  • Use Chargeback Automation for Centralized Information

Apart from the ROI benefits that a chargeback automation solution like Chargeflow provides, the intuitive dashboard also helps you harmonize the different touch points in the dispute process.

It’s impossible to manage disputes effectively when the data you need spreads across a thousand different touchpoints. With Chargeflow’s centralized dashboard, you can quickly track active chargeback cases, real-time chargeback rates, and the win-loss probability of open disputes. And you can use such information to plot your revenue projections graph with ease.

  • Chargeback Analytics Helps Optimize Long-term Risk Management

As we noted earlier, one of the crucial aspects of a solid chargeback accounting strategy is chargeback analytics. If you can't see (or quickly grasp) your numbers, you might face cash flow problems.

Tracking your chargeback rate seems relatively effortless. But it’s not. The formula for calculating chargeback-related financial losses isn’t always straightforward. The chargeback amount does not tell the whole story of your losses. There are so many ancillary costs with EVERY dispute; you might overlook those costs in the calculation.

Chargeflow features robust analytics that helps you create relevant reports and develop actionable strategies to keep up with what really matters.

  • Use Real-time Reporting to Stay Up to Date

With real-time reporting ChargeScore, you can effectively forecast chargeback success rates and get a better understanding of your current efforts up to the minute. By analyzing a massive body of data with proprietary algorithms, ChargeScore can determine with high accuracy your chances of recovering each chargeback and how much money you expect to recover from ongoing chargebacks.

Insightful data for accurate accounting

5 Chargeback Accounting Best Practices to Consider

It’s worth re-emphasizing that accounting for chargebacks is a fuzzy area.

Managing your business’ finances is complex enough. Chargeback accounting only makes it more daunting.

If you apply the following hacks to the aforementioned best practices, you can get the best from your chargeback accounting.

  • Write Off Uncollectible Chargebacks for Tax Purposes

While it’s detrimental to write off all chargebacks as a cost of doing business, it’s standard industry practice to write off uncollectible chargebacks for tax purposes.

Note that a chargeback is uncollectable when the chances of recovery are zero, such as when the customer files for bankruptcy. Another example could be when a law court wipes out the bills or exonerates the cardholder from reparation.

Since no partial payments are permitted, you can write off the repayment and add the evidence to your tax file.

  • Treat Chargeback Fees as Operating Expenses

As you already know, chargeback fees are non-negotiable, regardless of the outcome of the chargeback.

Hence, industry best practice says to record chargeback fees as operating expenses (i.e. bank charges). There’s an exception to that rule of thumb, though. That’s when you incur high dispute volumes.

If such is your reality, financial analysts say you should consider creating a different dispute-related sub-account for these charges. And you can equally use the same account to register every other ancillary expense.

  • Record Meritless Chargebacks as Accounts Receivable

More than 70% of chargebacks are friendly frauds. And you have to contest those invalid chargebacks through the representment process.

To account for the chargeback, you should enter the original transaction value as “Accounts Receivable.” Ideally, the ledger used here should be separate from your main ledger –it could be a dedicated creditors account that you’d ultimately merge into your main account.

And if you succeed in recovering the dispute, you can apply the transaction value against your accounts receivable dedicated to the chargeback. But if you lose, you must write off the account receivable as Bad Debt. Omitting that constitutes a crucial accounts receivable error.

  • Post Unwinnable Chargebacks Under Bad Debts

Industry best practice regarding unwinnable chargebacks or the chargebacks you don’t want to contest is to write off such chargebacks as Bad Debt expenses. That is crucial because a chargeback is not the same as a refund. Again, you can’t record such amounts as “Cost of Goods Sold.” Adding chargeback losses to the cost of sales is bad financial reporting.

  • Keep Your Chargebacks Under Control

In the final analysis, maintaining a low chargeback and fraud percentage is one definitive way to ensure you have fewer chargeback accounting headaches.

But to maintain a low chargeback and fraud ratio, you need tools and systems that can go beyond guesswork in preventing fraud. You need more relevant and comprehensive data on each transaction.

By and large, chargeback automation proves to deliver the best results in helping merchants save time and resources. Again, you equally have easy access to the relevant documentation for your chargeback accounting instead of struggling to gather all the reports needed for a complete ledger.

FAQs:

Why is Chargeback Accounting Complicated?

Chargeback accounting is complicated because of the numerous variables you have to contend. For one, chargebacks don’t follow a linear path; you won’t typically have a standard number of weekly chargebacks. That raises the chances of forgetting to record cases. Second, fighting an invalid chargeback is time-consuming. You have to continuously juggle multiple payable amounts over inconsistent time frames. And then you have the fact that there are several expenses you have to track, such as the nonrefundable fees by your acquirer. There are also merchandise costs, order shipping costs or legal and administrative charges.

Is chargeback a business expense?

While you could write off a chargeback as part of the claim settlement process, it’s crucial to note that chargeback is not a cost of sales. Writing off chargeback as a business expense is only possible for chargebacks with an “uncollectible” status. The amount is completely uncollectible. It’s possible to write that amount off as there won’t be any partial settlements.

How do you account for a chargeback in accounting?

First, post the initial chargeback -- reversal of the transaction under dispute-- to Accounts Receivable. Ideally, you can open a dedicated “Chargebacks Accounts Receivables” ledger for this. With that, each chargeback becomes money owed to you, for which you expect repayment. Second, if you succeed in recovering the dispute, you can apply the transaction value against your accounts receivable dedicated to the chargeback. But if you lose, you must write off the account receivable as Bad Debt. Omitting that constitutes a crucial accounts receivable error.

What does chargeback mean in accounting?

In simple terms, a chargeback is a transaction that results in a transfer of funds from the merchant's account to the customer's account by an issuing bank. Cardholders file chargebacks when they escalate a dispute against the vendor.

What is chargeback reconciliation?

Chargeback reconciliation involves all the activities that go into balancing the books when cardholders initiate a chargeback. Merchants typically keep two sets of accounting records and occasionally compare or reconcile these records with one another to ascertain that the money leaving an account matches the actual money spent. The often complicated and long, drawn-out series of debits and credits involved in a chargeback dispute constitute peculiar challenges requiring sharp management prowess, absolute adherence to best practices, and excellent bookkeeping.

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Average Dispute Amount
Average Dispute Amount
$
30
# Disputes Per Month
# Disputes Per Month
#
50
Time Spent Per Dispute
Time Spent Per Dispute
M
20
calculation
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1,000 hours every month with Chargeflow!
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