Dispute handling
- Ian Fondrk (Unlicensed)
Overview
Payment Service Providers (PSPs) help process transactions for businesses. They serve as an intermediary between businesses and customers for payment-related tasks. Since payments are done online, customers or card issuers sometimes dispute their transactions, due to reasons such as fraudulent activities.
PSP will then withhold disputed funds from being paid out to the business. After an investigation period, the dispute will be declared as either "won" or "lost". "Won" means the business will receive the transaction amount, while lost means the customer will receive the transaction amount.
During this process, multiple accounting journal entries will be created to represent the disputed transaction and its different stages.
Configuration
Required parameters:
Fields | Description |
|---|---|
| amount of the disputed item |
| calendar date of when the dispute is initiated by customer |
| calendar date of when the dispute is finally resolved, either with merchant "won" or "lost". |
Required accounts:
Account | Description |
|---|---|
| asset account representing revenue. e.g. "Revenue" |
| cash or cash equivalent account, e.g. "Cash", "Account Receivable" |
Optional parameters & accounts:
Fields | Description |
|---|---|
| the calendar date of when the subscription period begins. The date is included in the subscription period. |
| the calendar date of when the subscription period ends. The date is included in the subscription period. |
| liability account represent the deferred revenue. e.g. "Deferred Revenue". |
Walkthrough 1: Standalone dispute
On Nov 15th, John purchased a digital art and paid $100 via PayPal. A few days later, John discovered similar art pieces freely available online and started to question the legitimacy of his purchase. On Dec 1st, he decided to initiate a dispute through his issuing bank.
Event 1: payment is made
When the payment is made on Nov 15th, the revenue should be recognized immediately.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
11/15/2022 | Cash | 100 |
|
| Revenue |
| 100 |
Event 2: dispute is initiated
When John initiated the dispute on Dec 15th (initiated_date), PayPal withdrew the payment amount from the merchant's account. The revenue should be reverted.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/01/2022 | Revenue | 100 |
|
| Cash |
| 100 |
Event 3.1: dispute is lost
It took Paypal 20 days to investigate and resolve the dispute case. On Dec 20th (resolved_date), Paypal decided that this transaction was indeed fraudulent.
Since the payment amount had already been withdrawn when the dispute was initiated and would not be returned to the merchant. There are no additional journal entries.
Event 3.2: dispute is won
Alternatively, on Dec 20th (resolved_date), Paypal decided that John's claim was not well founded. The merchant should receive the payment amount back. The revenue reversion in Event 2 above should be canceled.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/20/2022 | Cash | 100 |
|
| Revenue |
| 100 |
Walkthrough 2: Subscription dispute
When looking at her bank statement on Dec 10, Lucy found a $100 charge that she didn't recognize. The charge happened 10 days ago. It was a payment for a 100-day Netflix subscription. She immediately disputed the charge with her issuing bank.
Event 1: subscription is purchased
On Dec 1st, Lucy, with a lack of awareness, purchased a 100-day subscription on Netflix. She was charged $100 on the same day. Upon purchase, the cash is received immediately by Netflix and revenue should be deferred.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/01/2022 | Cash | 100 |
|
| Deferred Revenue |
| 100 |
A series of daily journal entries should also be received to recognize revenue over the subscription period. service_start_date is Dec 1st. service_end_date is Mar 10th.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/01/2022 | Deferred Revenue | 1 |
|
| Revenue |
| 1 |
12/02/2022 | Deferred Revenue | 1 |
|
| Revenue |
| 1 |
... |
|
|
|
03/10/2023 | Deferred Revenue | 1 |
|
| Revenue |
| 1 |
Event 2: dispute is initiated
On Dec 10 (initiated_date), when Lucy initiated the dispute, the payment processor withdrew the payment amount from Netflix's account. The revenue should be reverted.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/10/2022 | Revenue | 100 |
|
| Cash |
| 100 |
In addition, the recognition schedule of the original subscription item is adjusted.
Data Requirement for Subscription Adjustment
The recognition schedule adjustment explained below is applicable only if the issued credit specifies which original subscription is being cancelled. Sometimes, such link between applied credits and original subscription is not stored in data.
Specifically, the remaining balance of deferred revenue as of Dec 10th (initiated_date) is recognized immediately as revenue.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/10/2022 | Deferred Revenue | 90 |
|
| Revenue |
| 90 |
The remaining balance of deferred revenue is calculated by summing up all journal entries on and prior to Dec 10th (initiated_date). Specifically,
balance = $100 (cr on 12/1) - $1 (dr on 12/1) - $1 (dr on 12/2) - ... - $1 (dr on 12/10) = $90
The future recognition schedule post-Dec 10th (initiated_date) is canceled out by creating a series of reversal daily journal entries.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/11/2022 | Revenue | 1 |
|
| Deferred Revenue |
| 1 |
12/12/2022 | Revenue | 1 |
|
| Deferred Revenue |
| 1 |
... |
|
|
|
03/10/2023 | Revenue | 1 |
|
| Deferred Revenue |
| 1 |
Event 3.1: dispute is lost
It took 5 days for the payment processor to investigate and resolve the dispute case. On Dec 15th (resolved_date), the payment processor decided that this transaction was indeed fraudulent.
Since the payment amount had already been withdrawn when the dispute was initiated and would not be returned to Netflix. There are no additional journal entries.
Event 3.2: dispute is won
In an alternative situation, 5 days after the dispute investigation, the payment processor concluded that the transaction was not fraudulent. The dispute was marked "won" for Netflix. In this case, all journal entries created in Event 2 should be reverted. The dispute should have no net impact on the revenue stream.
The revenue reversion in Event 2 was cancelled.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/15/2022 | Cash | 100 |
|
| Revenue |
| 100 |
The acceleration of deferred revenue recognition in the event was also canceled.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/15/2022 | Revenue | 90 |
|
| Deferred Revenue |
| 90 |
To restore the future recognition schedule, we first recognize a lump sum revenue for the dispute investigation period between Dec 10th (initiated_date) and Dec 15th (resolved_date), i.e. $5 = $1 (12/11) + $1 (12/12) + ... + $1 (12/15)
During the dispute investigation period, revenue recognition stops though the subscription service continues. When dispute is resolved as merchant "won", the accumulated revenue of the gap period is recognized immediately.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/15/2022 | Deferred Revenue | 5 |
|
| Revenue |
| 5 |
We then restore the revenue recognition schedule from Dec 16 to Mar 10th (service_end_date)
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
12/16/2022 | Deferred Revenue | 1 |
|
| Revenue |
| 1 |
... |
|
|
|
03/10/2023 | Deferred Revenue | 1 |
|
| Revenue |
| 1 |