Recording Refunds (Cambridge International IGCSE Accounting)

Refunds to credit customers

When is a refund given to a credit customer?

• A refund may be given to a credit customer

  • when their account has a credit balance
  • if they have overpaid for their goods
  • if they have returned goods after paying for them

• In these cases, the customer is owed money by the business

  • The customer can now be treated as a liability

How do I record a refund in the ledger accounts?

• Credit the cash or bank account in the nominal ledger

  • This is because the business is paying money to the customer
  • The asset is decreasing

• Debit the trade receivable's account in the sales ledger

  • This is to reduce how much the business owes the customer
  • The liability is decreasing

Case Study

• The liability is decreasing

Book of prime entry	Account to debit	Account to credit
Cash book	Trade receivable's account	Cash or bank account

Case Study Tina is a sole trader.

On 1 January, Dale buys goods on credit costing $500 from Tina. Tina records this by debiting Dale's account and crediting the sales account.

On 15 January, Dale accidentally sends Tina a cheque for $550. Tina records this by debiting $550 to the bank account. Tina balances this by making credit entries in Dale's account totalling $550.

On 22 January, Dale asks for a refund for the $50 extra that he paid.

On 23 January, Tina sends Dale a cheque for $50. Tina records this by crediting the bank account and debiting Dale's account.

Here are how the entries appear in Tina's books.

Sales account

Date	Details	$**	Date	Details	$
			Jan 1	Dale	500

Bank account

Date	Details	$	Date	Details	$
Jan 15	Dale	550	Jan 23	Dale	50

Dale account

Date	Details	$	Date	Details	$
Jan 1	Sales	500	Jan 15	Bank	500
Jan 23	Bank	50

Refunds from credit suppliers

When is a refund received from a credit supplier?

• A refund may be received from a credit supplier

  • when there is a debit balance on the supplier account
  • if the business has overpaid for their goods
  • if the business has returned goods after paying for them

• In these cases, the supplier owes the business money

  • The supplier can now be treated as an asset

How do I record a refund in the ledger accounts?

• Debit the bank account in the nominal ledger

  • This is because the business is receiving money from the supplier
  • The asset is increasing

• Credit the trade payable's account in the purchases ledger

  • This is to reduce how much the business is owed by the supplier
  • The asset is decreasing

Case Study Chris is a sole trader. Chris buys goods on credit from Maisy.

On 1 May, Chris buys goods on credit costing $200 from Maisy. Chris records this by crediting Maisy's account and debiting the purchases account.

On 4 May, Chris pays Maisy for the goods using a bank transfer. Chris records this by crediting the bank account and debiting Maisy's account.

On 11 May, Chris returns goods worth $50 to Maisy and requests a refund. Chris records this by crediting the purchases returns account and debiting Maisy's account.

On 13 May, Chris receives a refund of $50 from Maisy by a bank transfer. Chris records this by debiting the bank account and crediting Maisy's account.

Here are how the entries appear in Chris's books.

Purchases account

Date	Details	$**	Date	Details	$
May 1	Maisy	200

Bank account

Date	Details	$	Date	Details	$
May 13	Maisy	50	May 4	Maisy	200

Purchases returns account

Date	Details	$	Date	Details	$
			May 11	Maisy	50

Maisy account

Date	Details	$	Date	Details	$
May 4	Bank	200	May 1	Purchases	200
May 11	Purchases returns	50	May 13	Bank	50