Chargeback Accounting: How to Record Disputes

Proper dispute management is necessary for retaining hard-earned revenue. A vital part of dispute management is understanding the impact of disputes on your company, which is where proper bookkeeping comes in.

What is a dispute or chargeback?

A dispute or chargeback is a transaction reversal meant to serve as a form of consumer protection from fraudulent activity committed by both merchants and individuals. A cardholder can dispute a transaction for a variety of reasons, including fraud, unprocessed credit, goods or services not received, among others. When a merchant gets a dispute, the transaction amount will be debited from their merchant account. The only way that merchants can regain the transaction amount is by providing a dispute response document that disproves the cardholder's claims. Along with the debited transaction amount, merchants also receive a dispute fee which can not be regained.

Now that we have gone through the basics of the chargeback process, and what costs are involved, how can merchants keep an accurate record of disputes?

How to record chargebacks

To correctly record disputes, it is important to break down the different parts of the dispute process. Garrick Saito breaks it down for us:

Disputes are retracted proceeds from your credit card sales. There is only one of two possible outcomes: 1) you can prove to the credit card company that this is a legitimate charge, and they reverse the dispute or 2) you can't and will eat the expense.

In scenario #1, it should be charged to a receivable account (presumably, you have provided proof of the legitimacy of the original charge). I would call this account A/R - Chargebacks. If, after providing evidence of legitimacy, you are denied a chargeback reversal, then proceed to scenario #2.

In scenario #2, when it is deemed that you'll never receive that money back, you should charge it to Bad Debt Expense.

As Satio said, disputes that you have responded to and are waiting to hear if you have won or lost the dispute should be maintained in the Accounts Receivable. If the merchant loses the dispute, does not respond in the time frame, or chooses not to respond, merchants can charge the loss to Bad Debt Expense.

A merchant dispute fee should be charged to operating expenses, specifically under bank fees. The merchant can create a subcategory under bank fees if your company sees a significant loss coming from dispute fees. For example, a digital subscription merchant may only charge $5 a month for their service, and their dispute fee could be $7. This means that they could see a significant loss with a high dispute rate. For other merchants, this subcategory may be irrelevant, but it is always a good idea to keep an eye on the dispute fee amount in case action needs to be taken.

The true cost of disputes

Disputes cost merchants more than just the transaction amount. With added dispute fees, loss of merchandise or services, and time and labor put into responses has increased the cost of fraud. The merchant cost has risen to $3.13 for every dollar of fraud. This is why it is so crucial for merchants to do all they can to prevent disputes and create an effective and efficient response process when they do happen.