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Hello all.
I had a question and was wondering if you could help.
On a receivables ledger (as asset account) why are customer refunds recorded on the debit side? Surely they detract from receivables?
Why don’t you watch the free lectures? 🙂
They are a complete course for F3 and cover everything needed to be able to pass the exam well (and explain refunds in the lectures on chapter 16 of the free lecture notes!!).
Hi John. Thank you. Especially for pointing out that there are lecture notes (I did not know) and where to find the information relevant to my question, I appreciate it.
I generally find lectures difficult to follow, as I find myself having to rewind every 2 minutes because I missed something due to daydreaming! I find written material much easier because you can go through it at your own speed, and extract information more easily. I have studied the Kaplan book, but cannot recall where in it this is explained (if it even was). I am trying to revise in the quickest and most time efficient manner possible. I thought the answer could be provided in a short, sentence length response. If so, if you or anyone else could explain, that would be great. If not, that’s fine, I will check the notes.
A refund is simply a repayment of cash. For example maybe the customer paid us too much by mistake so we repay the extra.
When we receive cash we Dr Cash and Cr Receivables
If we give them back some of the cash – a refund – we therefore Cr Cash and Dr Receivables.
Hi John. Thank you so much.
If a question refers to receivables, and mentions a refund, is it not implying a return to the company of inventory/goods that had previously been sold to a customer on credit (hence previously increasing receivables)?
No – returns and refunds are two separate things. A refund is simply a repayment of cash to the customer.
We might repay cash because the customer has overpaid (as explained in my previous reply). We might repay cash because they returned goods for which they had already paid. If they return goods then we credit receivables (and debit either sales or returns). So they then have a credit balance.
If we then repay then money owing to them, we credit cash and debit receivables (which is always the entry for a refund).I appreciate that you don’t like watching lectures, but I go through examples of this in my lectures and I cannot type them all out here 🙂
Thank you John this is excellent. It has really helped. You have typed more than enough for me to understand.
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