How is each item recorded?
| Event | Entry |
|---|---|
| Customer refund | Refunds account, reducing sales; credit the payment account |
| Sales tax refunded with it | Reduce sales tax payable |
| Item returned in resellable condition | Inventory back at cost; reduce cost of goods sold |
| Item returned damaged or not returned | No inventory entry; the cost stays in cost of goods sold |
| Chargeback | Refunds or chargebacks account, plus the fee as an expense |
| Chargeback won | Reverse the chargeback; the fee may or may not be returned |
What is the monthly routine?
Pull refund and chargeback reports
From each store, marketplace and payment processor.
Record them gross
Separately from sales, not netted.
Update inventory
For items received back and resellable.
Adjust sales tax
Where you collected and refunded tax; marketplaces handle their own.
Review the rate
Refunds as a share of sales, by product.
Why record them separately?
Form 1099-K and platform reports show gross sales before refunds. Showing refunds as a separate line lets you reconcile to those forms and see how much revenue is lost. A rising refund rate is an early warning on a product or supplier. See Form 1099-K.
What if the refund is in a different year?
On the cash method, a refund is recorded when paid, even if the sale was last year. It reduces this year's income, not last year's. See cash vs accrual accounting.
How do you reduce chargebacks?
Use clear billing descriptors, tracked shipping, fast responses to customer emails and a visible refund policy. Respond to every dispute with evidence before the processor's deadline. A high chargeback rate can lead to account holds or closure. See why accounts get frozen.
Losing track of refunds?
We record refunds, returns and chargebacks correctly each month, keep inventory accurate and reconcile to your platform reports.
Questions people ask
How do I record a customer refund?
In a separate refunds account that reduces sales, with any sales tax refunded reducing sales tax payable.
How do I record a chargeback?
Like a refund, plus the chargeback fee as an expense. Reverse it if you win the dispute.
What happens to returned inventory?
Resellable items go back into inventory at cost; damaged ones stay in cost of goods sold.
Why is my 1099-K higher than my sales?
It shows gross amounts before refunds and chargebacks, which should be recorded separately.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
- IRS: Understanding your Form 1099-K
- IRS Publication 334: Tax Guide for Small Business
- IRS Publication 538: Accounting Periods and Methods
Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.
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This guide is general information. It is not tax or legal advice for your situation.