Debtors - Correct Issue of Refunds?

thedeitypo
thedeitypo Registered Posts: 1 New contributor ?
It has been a while since undertaking the AAT, and I was hoping that somebody could help me…..

I work within an Internal Audit team, currently undertaking a review of refunds issued within our Credit Control (CC) section. At present, the current process is fairly simple. Service areas contact CC to raise an invoice for a proposed service in the forthcoming year, CC then raises the invoice, and the service area receives the income straight away. These invoices are based on estimates, and then at the end of the year in question, either an amending invoice or a refund is issued to the customer using actual service levels.

Upon issuing the refund, the CC team charge the refund back to the original service area. The problem with this to me, is that the refund itself is not being issued through the Debtors Control account, and hence, does not appear within the subsidiaries account either.

As an example, I have detailed a simplified version of the double entry accounting currently in place for the two stages – Invoice & Payment, and also Issue of the Refund.

Invoice & Payment

DR Debtors Control – Invoice £100
CR Service Area – Invoice £100

DR Bank – Receipts £100
CR Debtors Control - Receipts £100

Current issue of Refund

DR Service Area – Refund to Joe Bloggs £100
CR Refunds - Refund to Joe Bloggs £100

DR Refunds - Refund to Joe Bloggs £100
CR Bank – Refund to Joe Bloggs £100

As you can see, and mentioned above, the refund is issued separately to the Control Account. The only indication within the customer account that a refund has been issued, is a small text note on the account (not to be confused with actual entries in the ledger).

Although theoretically all accounts balance, my argument is that, should the CC team not raise a Credit Note to ‘create’ a credit on account, which can then be refunded? This way, all entries should appear within the Control and Subsiduary Accounts, and it would provide for a full audit trail. If memory serves correct, this is not a complete Ledger and is not complying with an Accounting Standard (although can’t remember which one).

Upon approaching the manager in question, I was faced with a certain degree of opposition as they felt that a note on account, and the fact the Control Account & Subsiduary Accounts balanced was sufficient, so I took a step back and am now seeking further advice.

I have attached what I believe should be the correct entries at the end of this message (albeit I am rusty with double entry), but this way entries will be present within the accounts for a credit note, and then a clear refund on account.

Could somebody please confirm to me;

a) Whether the way in which the CC team issues refunds is incorrect?
b) Whether there is a relevant Accounting Standard to which this issue may relate?

I hope this is understandable.......

Any help would be greatly appreciated

Regards
Paul

P.S The Double Entry I believe is correct

Correct Issue of Refund (this should be achieved by issuing a credit note, and then refunding the credit on A/c)

DR Service Area – Credit note due to incorrect Invoice Joe Bloggs £20
CR Debtors Control – Credit note due to incorrect Invoice Joe Bloggs £20

DR Debtors Control – Refund due to credit on A/c Joe Bloggs £20
CR Refunds - Refund due to credit on A/c Joe Bloggs £20

DR Refunds - Refund due to credit on A/c Joe Bloggs £20
CR Bank - Refund due to credit on A/c Joe Bloggs £20

Comments

  • Smokey
    Smokey Registered Posts: 4 New contributor ?
    Hi Paul

    If credit notes are not issued via the debtors control account, then the debtor position will be overstated and DSO incorrect (unless manually altered each time), this would be important in a large company required to make statutory returns. Since you work in internal audit i assume this is the case. It would also make matching payments to invoices impossible as they would forever be part paid without a credit note to complete the posting. Customer statements must be horrific.

    From a finance dept point of view there is no good reason to keep refunds off the debtors ledger if they are related to services invoiced. I can see complications with credit control procedures, VAT documentation, Statutory reporting and an appropriate audit trail - i'm sure this goes against more than one accounting standard!

    As for the postings your middle stage isn't really necessary unless you need to move them through a refund account. I would imagine most customers would offset against invoices as opposed to receive cash back.

    The only time it wouldn't go through debtors ledger is if customer was a cash sale eg retail and they weren't on the debtors ledger.

    I hope this helps

    Jodie
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