PayPal processes transactions that represent credits and debits, which increase or decrease the PayPal bank balance. These transactions are categorized by PayPal for easier management and reporting.
This article focuses on the Chargebacks category, providing examples of transactions included in this category and guidance on selecting the appropriate general ledger account and tax rate in your connected accounting ledger.
What is a Chargeback?
A chargeback is a requested transaction reversal, typically initiated by a customer through their card issuer. Customers may request chargebacks for various reasons, including:
Non-receipt of the item
Receipt of a damaged or defective item
Unauthorized charges
A chargeback differs from a refund. Refunds are initiated voluntarily by the merchant and do not involve the credit card issuer. If a customer cannot resolve an issue with the merchant, or if the merchant disputes the refund, the customer may escalate the issue into a chargeback with their credit card provider.
When a chargeback is initiated, the merchant is notified and can choose to accept or dispute it. During the investigation, PayPal may place a Chargeback Hold on the funds. Once the investigation is concluded, PayPal will release the chargeback. If the ruling is in favor of the customer, the chargeback amount will be deducted from the merchant's account.
Here is an example of a chargeback:
Alice received a damaged dress. She contacted the merchant via email but received no response. She then raised a chargeback request directly with PayPal. After an investigation, PayPal ruled in Alice's favor. The merchant will see the following three transactions processed within their PayPal account:
Decrease to bank account - 'Chargeback Hold - Hold on Balance for Dispute Investigation (DR)'
Increase to bank account - 'Chargeback Hold - Cancellation of Hold for Dispute Resolution (CR)'
Decrease to bank account - Chargeback Activity - Chargeback (DR)
Please note any transactions containing the word Hold or Cancellation will be timing issues only.
Choosing the general ledger account
Your PayPal Fees will need to be mapped to a GL account. You can either:
Use A2X's Auto Setup and allow A2X to create this account, or
Choose your own account from your connected accounting ledger.
If you use A2X Auto Setup, A2X will create an account called PayPal Chargeback in the connected ledger. The account type associated with this auto setup account is 'current asset'.
Reconciling the general ledger account
The ending balance of this account should be zero (if all holds and releases net to zero) or timing issues only which would represent a hold which has not yet been canceled.
We recommend you map your Chargeback Activity - Chargeback (DR) row to a profit and loss account - this may be revenue, or a specific expense account created to capture the chargeback expense.
Choosing the Tax Rate
The appropriate tax rate for chargebacks depends on whether your business is registered for, and entitled to, a sales input tax credit for these transactions.
Normally, a no-tax code would be assigned to the Hold and Cancellation transaction types as these will cancel and are timing issues only, however, we recommend you check with your accountant or relevant tax authority to determine if sales tax is relevant.