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Journal Entry for Refund Received from Vendors or Suppliers

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Refunds occur for various reasons in the ordinary course of business. We often need to return items because we’ve changed our minds, the product didn’t meet our expectations, or it needs fixing. However, not all refunds are about returned goods. There are also refunds for reasons such as rewards, rebates, and points redemption, and they usually arise from loyalty programs or other incentive plans.

Understanding the journal entry for refunds received is important. In this article, we’ll cover the journal entries for refunds for (1) returned inventory purchases, (2) returned PP&E, and (3) rebates, rewards, and points redemption.

Refund Received for Returned Inventory Purchase

When we purchase inventory from suppliers, we may encounter damaged, spoiled, or less-than-perfect quality goods. Oftentimes, it’s the supplier’s fault since the goods probably didn’t go through thorough quality assurance. 

If this happens, coordinate with the supplier and confirm whether they can issue a refund. To illustrate, let’s say Casey has to return 6 damaged tabletops, and the supplier agrees to the refund. The price of each tabletop is $100. The journal entry for this refund is:

Journal Entry for Refund Received from Vendors or Suppliers - Refund for inventory purchases

Notes on the entry:

  • The $600 debit to Cash or Accounts Receivable is the refund amount from the supplier. (Calculated as $100 * 6 tabletops)
  • The $600 credit to Purchase Returns & Allowances is the amount we’ll deduct from the “Purchase” account in order to record the return.
  • The “Purchase Returns and Allowances” is considered a contra-asset account because it decreases the total balance of the “Purchases” account. This account is commonly used in the periodic inventory system.
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Refund Received for Returned PP&E

When we purchase fixed assets or PP&E (Property, Plant, and Equipment), we will debit the PP&E account to record the purchase. In the scenario of returning those purchases, a good rule of thumb is that we would reverse what we booked.

To illustrate, let’s say Alice has placed a $480 printer in service with a four-year useful life. The printer showed problems, so Alice decided to return it to the vendor. Though she has depreciated the asset for one month, she can still return the printer for a full refund. The journal entry for this refund is:

Journal Entry for Refund Received from Vendors or Suppliers - Refund for returned PP&E

Notes on the entry:

  • The $480 debit to Cash or Accounts Receivable is the refund for the returned, defective printer
  • The $480 credit to Fixed Assets or PP&E reverses the recognition of the asset when we initially recorded it in the books.

Another important factor to consider is the depreciation. In this example, Alice has already placed the printer in service and depreciated it for one month. As a result, we will need to reverse the depreciation and the P&L impact since the asset has been returned. Here is the journal entry:

Journal Entry for Refund Received from Vendors or Suppliers - Refund for depreciation reversal

Notes on the entry:

  • The monthly depreciation expense is $10, computed as $480/48 months. We assumed the straight-line method in computing depreciation.
  • The $10 debit to Accumulated Depreciation writes off the depreciation on the balance sheet.
  • The $10 credit to Depreciation Expense reverses the P&L effect of the depreciation recorded in the first month.
  • It’s important to reverse recorded depreciation when returning PP&E. Since the asset has been removed, its accompanying depreciation must also be removed.
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Alternatively, especially when the reversal occurs cross-period (For example, when the printer was placed in service in December, but the return takes place in January), we can also recognize a “gain on disposal.” Technically speaking, we “disposed” the printer for the full price of the asset ($480) while having a net book value of $470. Therefore, a gain of $10 can be recognized, which, in reality, offsets the expense incurred earlier and results in no net P&L impact. 

The alternative journal entry would look like this:

Journal Entry for Refund Received from Vendors or Suppliers - Refund for depreciation reversal and recognizing the gain

Notes on the entry:

  • The $10 debit to Accumulated Depreciation writes off the depreciation on the balance sheet.
  • The $10 credit to Gain on Disposal reverses the P&L effect of the depreciation recorded in the first month.
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Refund Received for Rebates, Rewards & Points Redemption

Suppliers/vendors often provide rebates to incentivize buyers/customers to purchase goods or services. Compared to discounts, which are applied upfront, rebates are typically issued to the buyer later.

Rebates

Businesses typically treat refunds as a result of rebates as a contra-expense rather than income. For instance, let’s assume we have spent $600 at a restaurant and received a rebate of $60 a few weeks later. The journal entry to record this rebate is:

Journal Entry for Refund Received from Vendors or Suppliers - Refund from the rebate

Notes on the entry:

  • The $60 debit to Cash is the rebate we received from the restaurant.
  • The $60 credit to Meals & Entertainment recognizes the rebate as a contra-expense. In other words, it goes against the original $600 meal expense recorded. 
  • The net P&L effect of this meal is $540 ($600 expense – $60 rebate/income)

If there is a delay in receiving the rebates, an accrual should be booked to ensure the P&L impact in that period is net of the rebate.

Cashback/Points/Rewards Program

Reward systems are popular among membership programs and credit cards. For example, some credit cards give one point per dollar spent. Others give a 2% cashback on selected purchases. Once you’ve accumulated enough points, you can redeem these points to get cashback or merchandise.

Cash received from these rewards programs is typically considered income. To illustrate, let’s assume we received $300 cashback from our purchases using a cashback credit card. The journal entry looks like this:

Journal Entry for Refund Received from Vendors or Suppliers - Cashback rewards

Notes on the entry:

  • The $300 debit to Cash is the amount refunded to us by the bank. 
  • The $300 credit to Other Income is to recognize this cash receipt in our income statement.
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Key Takeaways

  • The journal entry to record refunds for returned inventory includes a debit to Cash or Accounts Receivable and a credit to Purchase Returns and Allowances.
    • The Purchase Returns and Allowances account, which is a contra-asset account, reduces the amount of Purchases recorded in the books. 
  • There are typically two journal entries involved for refunds of returned PP&E:
    • First, we debit Cash or Accounts Receivable for the refund and credit PP&E to remove the balance of the returned asset on the balance sheet.
    • Second, we debit Accumulated Depreciation to remove the depreciation on the balance sheet and credit Depreciation Expense to reverse the P&L effect of the depreciation recorded earlier.
      • Alternatively, we can credit “Gain on Disposal” instead of depreciation expense, especially if the transaction is cross-period.
  • For rebates, the typical journal entry is to debit the Cash account and credit the expense account of the original purchase. For rewards/cashback, the typical journal entry is to debit the Cash account and credit Other Income. 

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