How chargeback works
A chargeback starts when a cardholder contacts their bank rather than the merchant, disputing a transaction as fraudulent, undelivered, or incorrect. The card network debits the merchant's payout for the disputed amount plus a chargeback fee, often before the merchant even knows a dispute exists, since notification can lag the actual reversal by days.
The merchant can respond with evidence, such as delivery confirmation or a signed receipt, and win the dispute back in some cases, but the process takes time and is not guaranteed. In the books, a chargeback needs to be matched against the original sale and the merchant processor's fee, or revenue and cash end up overstated. A high chargeback rate can also raise the processor's own fees or put the merchant account at risk of review.
Example
A customer disputes a $340 charge as unauthorized. The card network reverses the $340 from the merchant's next payout and adds a $25 chargeback fee. The bookkeeper records a $340 reduction to sales, a $25 chargeback fee expense, and reverses the related cost of goods sold if the item is not recoverable, so the general ledger matches what the merchant actually received.
Chargeback in QuickBooks Online vs Xero
Neither QuickBooks Online nor Xero pulls chargeback data automatically; it comes from the payment processor's settlement report and has to be entered or imported as a deduction against the deposit. Many businesses use a clearing account to hold chargebacks pending resolution before posting the final loss or recovery.
Common mistakes
- Recording a chargeback as a drop in the bank deposit instead of reversing the original sale, which leaves revenue overstated and cost of goods sold unmatched to what was kept.
- Not tracking the chargeback fee separately from the disputed amount, which understates the real cost of the dispute beyond the lost sale itself.
- Ignoring a rising chargeback rate instead of investigating the cause, which can trigger higher processor fees or put the merchant account at risk of review or termination.
Why it matters
Chargebacks quietly shrink the cash a business keeps from a sale, and a business that only watches gross sales can be blindsided by how much disputes and fees are eating into margin. For a merchant account, a high chargeback rate can trigger extra scrutiny or higher processing costs from the payment provider. Tracking chargebacks accurately shows an owner the real profitability of each sales channel, not just the top-line number.
Related terms
How LedgerBPO handles chargeback
We match every payout against the processor's settlement report and post chargebacks correctly against the original sale, so your books reflect what actually landed in the bank rather than gross sales. Recurring chargeback patterns are flagged so you can address them with your processor.