How E-commerce Returns Impact Your Accounting
Laura Tien

June 13, 2024

One of the main pain points for e-commerce stores is offering returns to customers while maintaining the business’s financial health and accounting processes. Having a clear understanding of how returns impact your accounting is crucial for keeping your records accurate.

We’ll delve into the financial impacts of returns and best practices around accounting. This will include tips on how to overcome common challenges and leverage key tools. At the end, we’ll share some strategies for return management such as how to reduce return rates and how to streamline the return process. 

Financial Implications of E-commerce Returns

Of course, the main consequence of returns for e-commerce businesses is usually financial. When a product is returned by a customer, the initial sale needs to be reversed, therefore reducing the revenue previously recognized. When return rates are particularly high, this means that other metrics such as net sales, customer lifetime value, and customer acquisition cost can be skewed.

On top of reversing the initial sale, there are multiple other costs to consider. Returned items need to be inspected and then restocked or written off. If restocked, you may have to sell the product at a discount, thereby adjusting the COGS (cost of goods sold). Additionally, there are logistics and handling costs, such as shipping and labor. These costs all add up and can dramatically affect your profit margins.

Why You Need Accurate Accounting for Returns

Properly managing your accounting for returns will make sure your records accurately reflect your financial health. 

With precise data, you can analyze customer behavior, identify trends, and pinpoint product or service issues. From there, you can make more informed business decisions on how to improve satisfaction and minimize returns. Use a returns management system like ReturnGO to automate your returns and track the data in an organized way, to make your accounting easier.

Moreover, accurate accounting is crucial for compliance and auditing as well. Hence, we always recommend working with a tax accountant to ensure you’re meeting regulations. An accounting professional can also help you verify transactions and identify discrepancies related to returns.

Challenges in Accounting for E-commerce Returns

With all the logistics involved with returns for e-commerce businesses, accounting can become quite a challenge. You need to account for return shipping costs, handling fees, restocking fees, and more. Plus, you need to reverse the initial sale in your records and update your inventory.

Furthermore, returns can make forecasting revenue and cash flow difficult. A potential solution to make sure your estimates are conservative involves creating a refund liability. This includes predicting how many returns you expect to receive over a certain period of time to avoid overstating revenues. The estimate should take into account seasonality, such as holiday periods, to ensure the impact on cash flow can be better managed.

At the point where returns are complicating your accounting, we typically recommend engaging with an accounting professional. An accountant or bookkeeper who has specific experience in e-commerce will be able to help you overcome the challenges of recording returns and forecasting.

Best Practices for Streamlining Your Accounting

Fortunately, there are a few best practices that you can use to make accounting for returns as easy as possible. First and foremost, you want to create an integrated ecosystem where all your different systems communicate seamlessly.

When looking for accounting software, aim to find one that can integrate with your e-commerce platform, expense management, inventory management, CRM system, and any other tool you commonly use. Keeping all your data in one place will significantly help during tax time and when building business insights.

How to Automate the Accounting for Returns

One of the most important integrations for streamlining the recording of returns is an accounting integration that connects your e-commerce platform (which gets updated by the returns management system) to your accounting software. For example, a Shopify to QuickBooks Online integration or WooCommerce to Xero integration.

With Amaka’s accounting integrations in particular, all transactions are synced on a daily basis, meaning your accounting software is always up-to-date and accurate. Refunds automatically sync as well, appearing as a credit note or negative amount. You can rest assured that adjustments are made in the background.

Benefits of using Amaka:

  • Completely free plan available as well as affordable paid plans.
  • Save hours on manual data entry and reconciliation.
  • Sales, fees, taxes, COGS, discounts, shipping, gift cards, tips, refunds and more are automatically synced.
  • Custom account mapping and grouping options.
  • Unlimited, round-the-clock support from a CPA-trained support team through video call or help desk.

Strategies for Better Return Management

There are multiple facets to effective return management, one being minimizing returns and another being streamlining the return process for customers. Focusing on both will help your e-commerce business maintain a balance between profitability and customer satisfaction.

In terms of discouraging frequent returns, you can start by creating a return policy with specific guidelines. For instance, offering store credit instead of refunds to retain revenue, charging restocking fees, or passing the cost of return shipping to the customer. 

Additionally, you can improve how detailed product listings are with high-quality images, videos, descriptions, size guides, etc. This will help customers make informed purchasing decisions.

Finally, using a returns management platform like ReturnGO can help to create a better experience for customers while also saving you time and resources. You can create a branded return portal that allows customers to do a self-service return or exchange. There is a range of customization options to suit any return policy. Additionally, you can encourage customers alternatives to refunds that help to retain revenue.

Benefits of using ReturnGO:

  • Automate returns by offering a self-service return portal.
  • Issue store credit and other alternatives to refunds.
  • Allow customers to keep or donate the item.
  • Configure custom return policy rules.
  • Integrate with a range of platforms.
  • Track return analytics to inform business decisions.

Key Takeaways on Accounting for E-commerce Returns

The impact of e-commerce returns on your accounting can be fairly substantial. By focusing on these accounting best practices, you can make sure your records are precise. 

From there, you’ll have a better understanding of how returns are affecting your financial health and improve on the strategies you adopt.

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Streamline your return process and ensure a great post-purchase experience for your customers.