How do I code items that arrive broken or faulty in my accounting software?

(Last Updated On: July 10, 2018)

Question – I have a question about breakages when you have sent the item to the customer or faulty goods.  Whenever I sell something that is not as described (mistakes happen) or has broken due to my packaging, I give a full refund and let the customer keep the item.  From the accounting perspective, I realize this isn’t like a credit, because the item does not go back into my inventory.  I am using Wave Accounting, though that’s not so important.  I am just wondering how I would code those transactions when they go out…spoilage?  Sorry, this is one area I’m pretty clueless on.

Our response – Create an income account called refunds.  You keep the original income but then add a negative refund in.  can easily do as a journal entry – debit: refund, credit: checking account.  Don’t touch inventory if you aren’t putting it back in because you’ll still need to add it into COGS at the end of the month.