Business Expense from Refund of Previous Year
I run a small business and a client this year, in 2021, has requested a refund of $800 for services rendered the previous year, 2020. Since I have already payed my taxes in 2020, this $800 has already been processed through my 2020 taxes, yet, that $800 is coming out of my business account THIS year in 2021. Is this considered a business expense?
Answer:
Yes and no.
Technically, I would code it to a contra-revenue account, something like Sales Returns and Allowances (that would be a general ledger account for a business that sells products). So you would debit or increase that account on the income statement and credit or decrease your bank balance on the balance sheet.
The effect would be that it would lower your profit (bottom line). So in that sense, it’s like a business expense, but it’s not actually an expense, it’s a reduction to overall revenue.
Adam Dickreiter
