USA Partial Sales Return for Service

[George McCann]

Hello everyone,

I'd like to ask about what's needed in a partial refund. Let me tell you what happened. The numbers are examples:

1- We sold marketing service for $1,000
2- We issued an invoice of $1,000 and got paid
3- After few months, at the end of the deadline, we couldn't deliver all of the marketing
4- The company that bought marketing from us wants $200 back.
5- We'll wire $200 back, but want to make sure we're doing it right

Do we need a refund invoice from them? If yes, where can I find info about what should be in that invoice?
What else do we need from them for proper book keeping, other than their bank info?

Thanks a lot in advance!

 

[Donald Chemski]

Yes you would need to create a regular invoice but include a credit amount, -$200 in your case. In your accounting software the transaction will Cr AR account and Dr income revenue account. Then when you pay it will Dr AR account and Cr Bank.

 

[George McCann]

Yes you would need to create a regular invoice but include a credit amount, -$200 in your case. In your accounting software the transaction will Cr AR account and Dr income revenue account. Then when you pay it will Dr AR account and Cr Bank.

Thanks Donald! I'm guessing Cr is short for Credit. What does AR and Dr stand for?

 

[Donald Chemski]

Yes Cr is credit and Dr is debit (the two offsetting entries in a balanced journal entry) , AR is Accounts Receivable. For example when I create a customer invoice for let's say for Heineken, then the posting of the invoice is a credit to inventory, because I'm selling beer, and a debit to Heineken's AR account. Then when they pay the invoice it's Dr bank/cash Cr Heineken's AR account. Hope that clarifies.

 

[George McCann]

Thanks, the client is from another country and they are saying they need some info for us to create a "Refund Invoice". I believe that's only for their own accounting legal system. For US, is it ok we just create a Credit Note invoice to them? (Then of course the bank wire)

 

[Donald Chemski]

Yes to all your questions, they need to create a return invoice and you would also need to create an invoice for your records. Just think of the transaction as them invoicing you for $200 and you paying the invoice.

Also, mom and pop accounting is Cr Cash Dr inventory/exp/etc, where there is no AP or AR account used. Larger companies will use AP accounts to track what they owe to vendors and AR accounts to track what customers owe your company. This goes back to accounting class and the topic of accrual vs cash accounting. Mom and pop recognize expenses and revenue when they actually receive the money and accrual accounting recognizes expenses and revenue when they invoice or receive an invoice. When you invoice a customer you recognize the income but you haven't received the money yet, you just created an invoice to mail or email to them.

Back to your situation, they create an invoice to track your payment back to them. And conversely you create a note invoice to remind your company to pay them the $200 back.

 

[George McCann]

Thanks! This is very valuable.

What should be in the return invoice they are creating to make sure everything is correct? I can not seem to find any info online about what is critical inside a return invoice that we'll receive.

 

[Donald Chemski]

Not sure of your question. They will send the return invoice which will basically be the same as a invoice you usually receive from vendors. It will just say that you owe them $200. It should also reference the prior invoice where they over paid. But other than that, you aren't really looking for anything just the $200 to pay them.

 

[George McCann]

Thanks, this has been super helpful. Kudos!