Returns and chargebacks are two unfortunate types of transactions that eCommerce entrepreneurs need to deal with. If you don’t enter and categorize them correctly, you could soon find your books out of whack.

A return is simple: someone who purchased your goods wants to return it and receive a refund. When this occurs, you will not record it as a cost; instead, you will deduct it from your income and designate it as “Returns and allowances.”

For example, if a customer purchased a $40 product and then returned it, the journal entries might look like this:

You would send $40 cashback to the customer, reducing your revenue as if the sale never happened.

A chargeback happens when a credit card company asks you to return the funds you charged to a customer’s credit card. This happens because the card’s user has told the company that the charges on the card are fraudulent. A chargeback can happen if their card was stolen and then used to make the purchase. It can even happen if the customer forgets they made the purchase, or if the transaction has a weird name on their statement that doesn’t line up with your store name.

The money you withdraw for the chargeback should be categorized as “Returns and allowances.”

All chargebacks are subject to processing costs. You have the option of recording the cost as a standard company expense or creating a chargeback fee expense category.

Suppose the customer made a $40 purchase and later did a chargeback on it—so the revenue has to be returned. Plus, the credit card company charges you a $10 fee, which you pay out of your cash account. The journal entry might look something like this: