A chargeback happens when a cardholder asks their card issuer to reverse a payment, for example because goods did not arrive, the transaction was not authorised or a subscription was not cancelled. The issuer takes the money back from your card processor, and the processor takes it from you, usually with a fee, before anyone has decided who is right.
From a bookkeeping point of view a chargeback is awkward because the money leaves first and the outcome comes weeks later. The answer is to record each stage as it happens.
Stage 1: the processor takes the funds
The disputed amount and a chargeback fee are deducted from your next payout, or debited from your account. The original sale is still in the books and the invoice was paid.
Do not reopen the sale yet. Post the deduction to a disputed card payments account in current assets (some charts call it chargebacks receivable), because until the dispute is decided it is money you may get back.
Example: a customer paid £240 by card for goods. Three weeks later the processor deducts £240 plus a £15 chargeback fee from the payout.
| Entry | Debit | Credit |
|---|---|---|
| Disputed amount withheld | Disputed card payments £240 | Card clearing account £240 |
| Chargeback fee | Bank charges and merchant fees £15 | Card clearing account £15 |
The card clearing account then reconciles to the reduced payout. How that account works is explained in card payment clearing in the chart of accounts.
Stage 2: respond to the dispute
Most processors give a short deadline to submit evidence, often a matter of days. This is called representment. Useful evidence includes:
- the order, invoice and the customer’s acceptance of your terms;
- proof of delivery or of the service being provided, with dates;
- emails or messages with the customer;
- for “unauthorised” claims, the authentication data the processor holds (such as whether 3-D Secure was used);
- your refund and cancellation policy, and evidence the customer saw it.
Keep a copy of everything you submit in the same place as the sale. If you decide not to contest, accept the chargeback promptly and go to Stage 3b.
Stage 3a: you win
The processor returns the £240 in a later payout. Clear the disputed account:
| Entry | Debit | Credit |
|---|---|---|
| Funds returned | Card clearing account £240 | Disputed card payments £240 |
The original sale stands, and so does its VAT. The chargeback fee is usually not refunded, even when you win; check your processor’s terms.
Stage 3b: you lose
The money is gone, so the sale needs to be reversed or written off. Which route you take depends on what happened:
| Situation | Treatment |
|---|---|
| Customer returned the goods or the service was not provided | Issue a credit note for the sale; this reduces output VAT and the sale |
| You supplied the goods and the customer keeps them (friendly fraud, lost dispute) | Write off the amount to a chargeback losses or bad debt expense account |
| The card was used fraudulently | Write off to chargeback losses; record the incident for your fraud controls |
VAT depends on the route. A credit note for a genuine return or cancellation reduces the output VAT you declared. Where you made the supply and simply did not get paid, the output VAT already declared is not automatically reversed; you would need to meet the conditions for VAT bad debt relief to recover it. Take advice if the amounts are significant. The write-off route is covered in bad debts in the chart of accounts.
Chargeback or refund?
If a customer contacts you first, a refund is almost always cheaper: it costs no chargeback fee, does not count against your dispute ratio with the processor, and is simple to record against the original sale. A processor that sees a high proportion of disputes can hold back part of your payouts as a reserve or end the relationship. Refunds are covered in customer refunds in bookkeeping.
Monthly review
At month end, list every item in the disputed card payments account with its date and status. Anything still there after the processor’s normal decision period needs chasing. At the year end, any dispute you are likely to lose should be written off or provided for, so the balance sheet does not carry money you will not see again.