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How to account for RMAs?

An RMA is issued and the inventory is sent to customer before they've returned the items to us. How are folks accounting for this inventory in transit? (well, RMA in transit). Our inventory was depleted, however, the expectation is that we'll be getting product back (plan is if we don't get it back within 30 days that we'll charge the customer). Thank you.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

You still show the invoice open until you receive goods, so a RMA can be considered a contra-sales order; which is a management accounting issue, not financial accounting.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Hopefully your ERP system will track the RMA transaction until a goods receipt occurs when the returned item arrives at your warehouse. I'd suggest you examine your RMA reserve account balance (in case the RMA amount is really material), but until you examine the returned item, you don't know whether:
1- you will be able to repair and/or resell the item (i.e. keep it in inventory once repaired)
2- you will simply return it to your vendor/raise a claim on the vendor (in which case it becomes a claim receivable/vendor debit memo)
3-scrap it and try to recover some scrap value.
As a result, I would submit it is not Inventory in transit.

The shipment of a replacement item will be transacted according to your terms of business with the customer, e.g.
1-is the original item covered under a SLA or warranty? if so, then the original invoice remains due, while the cost of the replacement item should be charged to your warranty expense account as soon as it ships.
2-if no warranty exists, then the shipment of the replacement item likely creates a new invoice/receivable, with a new due date, while the return of the RMA item will trigger a credit memo (to offset the unpaid original invoice) and the inventory transaction depends on the way you handle the return (see the 3 options above).

Anonymous
(Controller) |

We currently are on QBO and are accounting for inventory and RMAs manually, which isn't quite working. All do to excessive growth, however, we're working actively to plug the holes and put in systems/controls. We are moving to NetSuite, however, realistically we won't be live until April/May (at the earliest) and thus are trying to put in band-aids during the interim. Inventory is material to our balance sheet.

Thank you for your input as it is much appreciated.

brian flynn
Title: president
Company: receivable consultants int'l
(president , receivable consultants int'l) |

Encouraging to hear you are"working to actively plug the holes in system/controls"; hopefully the root causes driving your returned product issue. Understandable that in a situation of high sales and shipping growth inadequate systems and controls lag. Your efforts and investment in plugging the holes should produce updated business rules, policies and processes scaled to your growth and lessons learned.

Sounds like you may also be experiencing a cash flow issue as a result of all of this. An estimate of four months to new solution going live suggests a very expensive period (assuming a level of RMA requests being received at such a level that operations is unable to keep up).

Best of luck.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Anon,

Apart from the interim fixes, may I suggest you pay attention to the design and implementation of your new system regarding your order management and RMA processes.

It is key to you and your colleagues to determine how you need to process these transactions in future so that your requirements drive the configuration of the software. I've seen many disappointments arise because the new system did not work as expected, because the design, configuration and UAT (user acceptance testing) was inadequate.

Good planning, and good luck!

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