OVERVIEW

Reconciliation is recommended for exchanges and gift cards due to limitations within Shopify around returns. It’s important to understand the what and the why behind the numbers we see in Shopify reports to understand the need for reconciliation. 

In this article, we'll cover:

• Refunds & Returned Item Accounting

  • Shopify Order Adjustments

• Full Refunds

• Partial Refunds

• Exchanges 

• Store Credit Gift Cards 

Each time a payment is refunded and items are added back to stock, actions are taken by Shopify to ensure financial records remain intact. The primary way this is achieved is by the “order adjustment - N/A” that Shopify applies. The behavior of the order adjustment varies from scenario to scenario, but understanding its application means a straightforward path to accurate returns accounting.

Order Adjustments (N/A) are Shopify generated values intended to balance financial reports when refunds are issued for returned products. These adjustments are applied to Returns & Net Sales, but because of the complex nature of returns, they can often be difficult to understand and lead to confusion around returns accounting. Below are a few return scenarios to help further understand the application and any steps needed to reconcile. 

Order Adjustments are dependent on two components:

1. Refund (transaction)

2. Marking a product as returned

Example: $20.00 product with $1.50 sales tax for an order total of $21.50; Customer refunded full amount

When a customer is issued a refund, two actions are taken, resulting in order adjustments of $21.50 and correct values across the board:

1. Refund is issued for $21.50 to customer

   • Creates a negative order adjustment for the amount of the refund (-$21.50) applied to Returns, Net Sales, and Total Sales

2. Product is marked as returned, resulting in two more actions

   • Product value and tax value are returned to the original order (-$20.00 and -$1.50)

   • Creates a positive order adjustment for the price of the product returned + tax ($21.50) applied to Returns, Net Sales, and Total Sales

Example: $20.00 product with $1.50 sales tax for an order total of $21.50; Customer refunded $14.50, due to $7.00 return handling fee

When a customer is issued a partial refund, two actions are taken, resulting in order adjustments of $21.50 and  correct values across the board:

1. Refund is issued for $14.50 to customer

   • Creates a negative order adjustment for the amount of the refund (-$14.50) applied to Returns, Net Sales, and Total Sales

2. Product is marked as returned, resulting in two more actions

   • Product value and tax value are returned to the original order (-$20.00 and -$1.50)

   • Creates a positive order adjustment for the price of the product returned + tax ($21.50) applied to Returns, Net Sales, and Total Sales

Without native functionality within Shopify to support exchanges (transferring a sale from the original product to a new product), Loop must use alternative methods to achieve a seamless exchange. 

When a customer exchanges an item, the value of the original purchase is not issued back to the customer as a refund. Instead, the product is returned to Shopify and an order for the new product is created and discounted to $0 (loop-discount). This presents a need for manual reconciliation, if using Shopify reporting.

Example: $20.00 product with $1.50 sales tax for an order total of $21.50; Customer is exchanging for another $20.00 product

When a customer requests an exchange, a few things take place: 

1. Original product is marked as returned, resulting in two actions:

   • Product value and tax value are returned to the original order (-$20.00 and -$1.50)

   • Creates a positive order adjustment for the price of the product returned + tax ($21.50) to Returns, Net Sales, and Total Sales

2. New order is placed for exchange product

   • Loop discounts product price to zero, creating a value in the discount column

   • Loop adds correct tax to the new order, creating a value in the tax column 

3. No refund is issued to customer

   • Does not create an additional order adjustment for refund. As a result, the net sales and returns are inflated, because the positive order adjustment for the creation of the exchange was not offset by a refund. This requires reconciliation, learn more in the Exchange Accounting Options article. 

The resulting financial report represents correct values for Gross Sales and Tax, however the following adjustments are needed to ensure full accuracy: 

1. Subtract Tax value of the exchange product(s) ($1.50) from Returns, Net Sales and Total Sales

2. Move Discount (-$20.00) from exchange order to Returns column

Store Credit Gift Cards issued to customers for returned items present a similar impact on financial reports as exchanges and are easily accounted for by including the gift card amount as if it were a refund. This simply means subtracting the Gift Card amount from Returns, Net Sales and Total Sales. 

Example: $20.00 product with $1.50 sales tax for an order total of $21.50; Customer is getting a store credit gift card for $21.50

When a customer requests a store credit gift card, a few things take place: 

1. Original product is marked as returned, resulting in two actions:

   • Product value and tax value are returned to the original order (-$20.00 and -$1.50)

   • Creates a positive order adjustment for the price of the product returned + tax ($21.50) to Returns, Net Sales, and Total Sales

2. Loop issues a Store Credit Gift Card to the customer for $21.50

The resulting financial report represents correct values for Gross Sales and Tax, however the following adjustments are needed to ensure full accuracy: 

1. Subtract Gift Card ($21.50) from Returns, Net Sales and Total Sales

Is reconciling necessary if we don't use Shopify as our primary reporting tool? Not likely, if you use a third party finance tool, but it's still important to understand what's happening between Shopify and Loop to ensure your third party finance tool is accurate.

What time zone is Loop reporting in? Adjustment reports reflect the time zone on the Shopify store but the rest of the reports are in GMT. 

For any other accounting questions, please contact your Merchant Success Manager or support@loopreturns.com.