Exchange Accounting Overview (Basic)

OVERVIEW

This article is a brief primer on exchange accounting complications. After reviewing this article, Loop suggests visiting Exchange Accounting Overview (Advanced) for a more in-depth explanation.


In this article:

Background of exchanges in Shopify

Historically, Shopify has supported returns for refund only. They didn't have functionality for exchange or store credit returns, in which customers return a product and get a new one but do not get a refund.

To bypass Shopify's limitations, Loop created workarounds to support exchange and store credit returns. However, these workarounds create discrepancies in Shopify accounting that must be reconciled.

Note: Shopify has recently released exchange functionality. Loop is not leveraging this yet but will provide more details soon.

Loop exchanges and accounting discrepancies

Accounting discrepancies for exchange and store credit returns stem from the lack of a refund.

Each time a return is processed in Loop, Loop marks the items as returned against the original order in Shopify. When an item is marked as returned, Shopify anticipates a refund will be processed, and this is where the exchange accounting issues emerge from.

Since Shopify anticipates a refund will be issued, it creates a positive order adjustment for the value of the returned items, plus tax, in the Returns and Net Sales report columns. Shopify expects that this adjustment will be canceled out by a refund, which will undo the sale of the items being returned.

The image shows a Shopify report for a specific order. The report includes rows for the original order, the return, and the return order adjustment. Each row includes values for adjustments, the sale kind, gross sales, discounts, returns, net sales, taxes, and total sales. The return order adjustment has positive values combining the return and tax amounts from the Return row.
A Shopify report showing rows for the original order, the return, and a positive order adjustment. The adjustment values (Returns and Net Sales columns) are a combination of the sales and tax from the Return row.

However, because refunds are not issued for returns ending in exchange or store credit, there is nothing to cancel out the positive order adjustment. Therefore, Shopify numbers for returns and net sales are inflated by the value of the returned item or items, plus tax.

To remove these positive order adjustments, merchants must follow a financial reconciliation process that is outlined in the Reconciliation Overview.

Further reading

  • Exchange Accounting Overview (Advanced) is the follow-up to this article. It adds to the information above with details about each stage of an exchange and how Shopify reports reflect the process.
  • The Loop Discount explains how merchants can make exchanges show up in their reporting in the way that makes the most sense for them.

Please reach out to support@loopreturns.com with any additional questions.

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