What it means
Refunds can sit between systems: customer service may approve a return, the warehouse may have received an item, finance may be waiting for a credit note, and the payment provider may take days to return money. If each team assumes another has finished the work, customers wait and the ledger can show an incorrect balance, so a periodic review ties the obligation to a named owner and status.
Start with return authorisations, cancellation records, complaint settlements, payment disputes and any approved goodwill amounts, and link each to the original order and receipt. Verify the refund basis, whether full or partial price, delivery charge, tax or any legitimate deduction, and check the applicable consumer rights and agreed policy.
A requested refund that is still under review may require different treatment from one already approved. Match approved amounts to the refund queue, payment processor and bank, remembering that a card refund may be initiated but not yet settled and a bank transfer may fail because details are wrong.
Reconcile chargebacks separately so the business does not both lose the card payment and issue a second manual refund for the same claim. Consider goods or service status as well, since a returned product may need inspection but a statutory refund right or agreed remedy may have its own timing.
Finance should not wait indefinitely for a warehouse status that has been lost, and should escalate uncertainty to the owner of the customer decision with a deadline and evidence needed. At period-end, list open approved refunds by age, customer, amount and expected settlement route, and compare the list with ledger liabilities and subsequent payments.
Distinguish refunds that reverse revenue from separate compensation or service credits according to the accounting rules, since tax adjustments may require proper documents. Record estimates and uncertainty where amounts are not yet final, because material cases deserve careful review.
Look for root causes as well, since a spike in refunds may follow quality defects, poor product descriptions, late delivery or confusing cancellation terms. The liability review is not a tactic to reduce refunds by denying valid claims, but a way to honour them accurately and learn why they arose.
A clear register prevents a pleasant-looking cash balance from masking money that already belongs to customers. It also helps the team close cases without repeated calls and gives the owner confidence that approved obligations are visible in the ledger.
In practice
Real-world examples.
Example
A retailer approves a partial refund after a damaged delivery and records it as outstanding until the card provider confirms processing. The finance team sees the case in its open-refund list and checks the provider's reference at month end.
Example
A hotel has approved booking refunds after an event cancellation. Finance checks the customer list and avoids issuing a duplicate bank transfer for a card chargeback that has already returned the money.
Example
A service company promises a goodwill credit, but the actual invoice adjustment is not yet posted. The review keeps that obligation visible, so the customer is not billed for the full amount by mistake.
Formula
Calculation
Approved-refund subledger balance = opening approved refund liability + newly approved refunds - refunds settled - valid reversals or adjustments
Worked example. An invented business opens with $30,000 of approved unpaid refunds, approves $18,000 more, and settles $22,000 during the month. There are no adjustments. Closing liability = $30,000 + $18,000 - $22,000 = $26,000. A customer-level list should support the $26,000, with unsettled payment attempts still shown as open, and if $9,000 of it is older than 30 days then 9,000 / 26,000 = 34.6% of the balance needs escalation.
This approved-refund roll-forward is not the complete IFRS 15 refund liability, because expected returns and other variable consideration may require an estimate before individual approval. For instance, if $500,000 of sales carry a right of return and the business expects 4% to be returned, the expected-returns estimate = $500,000 x 4% = $20,000.Case study
Seen in the real world.
This illustrative and entirely fictional example follows Fern Outfitters, an invented online store. Customer service approved refunds for a defective batch of jackets. The store's dashboard marked each case "resolved" when an agent clicked approve, but payment processing failed for several cards. Customers contacted the store again, while finance believed all refunds had been paid. Fern reconciled approval records with processor confirmations and bank movements.
It found the failed transactions, contacted the affected customers through its normal service route and arranged valid alternatives where appropriate. Finance recorded the still-open amounts and created an ageing report showing approvals, initiated payments and settlements as separate stages. Product quality staff investigated the defective batch. The owner learned that a green customer-service status was not proof of cash leaving the business. Later reviews caught stalled refunds before customers had to chase them, and the ledger reflected obligations that had already been approved.
Watch out
Common mistakes.
- Marking a refund paid when it was approved or initiated but the payment failed.
- Paying a manual refund without checking whether a chargeback has already reversed the transaction.
- Using an unresolved inspection as an excuse to leave a valid customer obligation unowned indefinitely.
Questions
People also ask.
Is every refund request a liability?
Not automatically. Review the facts, applicable rights, approval status and accounting policy before classifying it.
When is an approved refund closed?
When the settlement or valid offset is confirmed and the customer and ledger records agree.
What should the review show?
Customer-level open amounts, age, reason, payment route, owner and any difference between approval and settlement.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%