Ecommerce returns accounting is more complicated than simply reversing a sale. A customer buys a product for $100 and then returns it. You give them their $100 back. It would be easy to assume you are right back where you started.
You probably aren’t.
You may still have credit card fees. You may have paid shipping or return shipping. The product may come back damaged. Or it may never make it back into sellable inventory.
If you have a lot of returns, these differences can have a real impact on your numbers.
Gross Sales Can Look Better Than the Business Really Is
Ecommerce owners naturally watch sales. Shopify, Amazon and other platforms make that number easy to see.
But gross sales do not tell you much about profitability by themselves.
Assume two ecommerce businesses each have $500,000 in monthly sales. The first has $10,000 in returns. The second has $50,000.
Those are two very different businesses even though they both started with $500,000 in sales.
This is why we spend so much time making sure our ecommerce clients have accurate monthly financial statements. We want the accounting to show what actually happened during the month, not just how much product went out the door.
A $100 Refund Does Not Undo a $100 Sale
This is where things get interesting.
You sell a product for $100. The customer returns it and you issue a $100 refund.
The sale is gone, but some of the costs may not be.
Depending on your payment processor, you may not get all of the processing fees back. You may also have return shipping or fulfillment costs.
Then there is the product itself.
Can you sell it again? Is it damaged? Did Amazon put it back into sellable inventory? Did the product disappear somewhere in the return process?
All of those things matter.
What Happened to the Inventory?
This is one of the bigger accounting issues with ecommerce returns.
If you sold an item, its cost should generally move out of inventory and into cost of goods sold. If the customer returns that item and it can be sold again, the inventory needs to come back.
That sounds simple.
It isn’t always simple when you are selling hundreds or thousands of products through Amazon, Shopify or multiple sales channels.
Amazon FBA can make this even more interesting. You may never physically see the returned product. Amazon may decide whether it is sellable, damaged or otherwise unavailable.
There may also be a reimbursement later.
If all of this activity is not accounted for correctly, your inventory and cost of goods sold can slowly move away from reality.
Returns Can Throw Off Your Gross Margin
This is where bad ecommerce accounting starts affecting business decisions.
Suppose you have a great December. Sales are strong and your gross margin looks fantastic.
Then January comes and a large number of those products are returned.
If the returns, inventory and cost of goods sold are not handled correctly, December can look more profitable than it really was. January can look worse.
Now you are comparing two months using numbers that do not tell the whole story.
That makes it harder to answer the questions that actually matter.
Which products are making money? Which sales channels have the best margins? Are you spending advertising dollars on a product that sells well but gets returned too often?
Those are questions your accounting should help answer.
Some Products May Have a Return Problem
We also don’t like looking only at one company-wide return percentage.
A 5% overall return rate might not look bad. But that number could hide a SKU with a 20% return rate.
The same thing can happen between sales channels.
Your Amazon customers may return a product at a much different rate than customers who buy the same product directly from your Shopify store.
That matters when you are trying to determine whether a SKU is actually profitable.
A product can generate a lot of sales and still be a lousy product for the business.
Your Monthly Accounting Should Make This Easier to See
At Schultz & Associates, CPA, we want monthly accounting to give ecommerce owners information they can actually use.
That means getting the sales right. It means getting the refunds right. It also means properly accounting for inventory, cost of goods sold, payment activity and other costs that affect your margins.
We use tools such as A2X and QuickBooks Online to help bring information from Amazon, Shopify and other platforms into the accounting system.
But software is only part of the process.
The goal isn’t to get thousands of transactions into QuickBooks. The goal is to turn all of that activity into accurate monthly financial information.
If sales are growing but profits are not keeping up, returns are one of the first places worth looking.