How to record: Product purchased and returned for refund

[Duane Evenson]

Nelson Tang wrote:
> On 10/29/06, Grant <emailgrant at gmail.com> wrote:
>   
>>> In the same account.   The first would be:
>>>
>>>   Checking -> Expense
>>>
>>> The refund would be:
>>>
>>>   Expense -> Checking
>>>
>>> (Or Credit Card, or whatever)
>>>       
>
> This will probably show my ignorance of basic accounting, but if the
> refund happens in another reporting period, like the following month,
> then won't the reports be somehwat confusing?  In other words, the
> previous month will show the charge and the following month will show
> the refund.  If you didn't know that there was a refund coming for a
> large charge, it would appear that you spent a lot more in the
> previous month.  Is ths just to be expected?
>
> --nelson
>   
Yes. If the purchased item is expensed right away (accounted for as an 
expense rather than an asset). Then the expense will appear in the first 
period and a credit will appear in the second. It may appear strange but 
it accurately represents the state of affairs.
Something to remember is the matching principle: expenses are recognized 
in the same period as the related income is realized. So the purchase 
will be fully expensed in the first period only if the related income 
occurred in that period. This principle is constrained by the 
cost-benefit relationship, materiality, and industry practice. I'm not 
going to expense my pen over several months even though I benefit in 
several time periods - first because it's immaterial and also because 
its not worth the trouble.
Speaking of expected, if you reasonably expect to return the item for a 
refund, then you should account for that occurrence. You could use a 
contra-account that will reduce the expense account and a related asset 
account. I wouldn't even use the expense account; just account for the 
purchase to a returnable asset account, then net assets and expenses 
aren't affected at all, yet the activity is accounted for accurately.

Duane