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I just got store credit when I returned some bad juice. This left me wondering. Which accounts receive the entries when a store issues store credit?

For example, when I made the payment for the juice, they must have made two entries --one for cash received (positive) and one for inventory (negative). In this case I believe the following to hold true:

  1. They will have to write down the inventory (bad juice).
  2. They will not change the cash account because they did not give me any cash back.

Furthermore, the store credit expires in the next 6 months. If I do not use it by then won't they simply have a positive cash flow but no revenue item corresponding to it? Are there accounting policies to explain such cash flows?

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The store credit you recieved would be a liability to the company until either you use it or it expires.

They would credit their cash account and debit accounts payable. Once you make a purchase they will similarly credit accounts payable and debit their inventory account.

I used simplistic account names, but the company more than likely has appropriately named Asset and Liability accounts for this transaction.

Although they never actually transfer money to you they have to treat it the same from an accounting perspective.

This page offers a similar explaination.

  • Thanks for sharing the link. They probably don't use the accounts payable as that is meant for suppliers. But it does make sense to record such a transaction as a liability and I get your general idea. Also, the bit on state laws prohibiting an expiry date on gift cards takes care of my second question above. Based on the posts there it also makes sense to exclude such transactions from the cash flow analysis because they don't actually represent regular operating income. Thanks a lot! – Apoorv Khurasia May 27 '11 at 18:21

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