What is Chargebacks?

When a customer disputes a card transaction with their bank, the bank can reverse the payment and take the money back from the merchant. That reversal is a chargeback. The merchant can usually respond with evidence, and the card network decides the outcome.

Common reasons

• Customer says they did not receive the item or service
• Item not as described
• Unrecognized transaction, sometimes because the business name on the statement is unclear
• Fraudulent use of a stolen card
• Duplicate charges or processing errors

The cost

A chargeback typically means losing the sale amount, a chargeback fee from the processor and, for goods, possibly the merchandise itself. High chargeback rates can lead processors to hold reserves or close the account.

Recording chargebacks

Record chargebacks as reductions of revenue, or in a contra-revenue account, and chargeback fees as an expense. If the dispute is won and funds are returned, reverse the entry. Do not let the reduced deposit absorb the chargeback; that hides both the lost sale and the fee. See credit card reconciliation.

Reducing chargebacks

• Use a clear business name that appears on card statements
• Provide tracking and delivery confirmation
• Respond to customer complaints quickly and offer refunds where appropriate
• Keep signed agreements and records of service delivery

Effect on tax reporting

Payment processors report gross payments on Form 1099-K without subtracting chargebacks or refunds, so your records must show them to reconcile the form; see Form 1099-K. The IRS's understanding your Form 1099-K page explains what the form includes. See also our ecommerce bookkeeping page.

Browse more definitions in the small business glossary.