Online shops: January returns belong in December's accounts

An online shop whose year ends on 31 December should not count every December sale as income if some of those parcels will come back in January. For limited companies reporting under FRS 102, the rewritten revenue section that applies to years beginning on or after 1 January 2026 sets out how to handle it, and for a company with a calendar year the year to 31 December 2026 is the first under the new wording. In ecommerce accounting, returns are the line it touches most directly. Sole traders on the cash basis, the default for them, are outside it: their sales count when the money arrives and refunds when they are paid.

What the standard says

The Financial Reporting Council's FRS 102 now deals with a "sale with a right of return" in paragraphs of its own. A business recognises:

• revenue only for the products it expects not to be returned;

• a refund liability for the money received for products it expects to be returned;

• an asset, classified as stock, for the products it expects to get back, with a matching adjustment to cost of sales.

That asset starts at what the goods were carried at, less the expected cost of getting them back and any fall in their value, for example because they come back damaged or will have to be sold for less. The estimate is updated at every year end.

One detail matters for clothing and shoe shops. Swapping a product for the same item in another size or colour, at the same price, does not count as a return under these paragraphs.

The old version of FRS 102 also asked for a provision for returns where they could be estimated reliably. The new paragraphs set out the entries in more detail: a liability for the refunds and a stock asset for the goods on their way back.

Small companies that use the reduced disclosures in Section 1A follow the same recognition rules. Micro-entities reporting under FRS 105 have a shorter version: refunds are a variable part of the price, and the sales figure includes only what it is highly probable the business will keep.

Why it reaches the tax bill

A company's trading profit for Corporation Tax starts from accounts drawn up under generally accepted accounting practice, which section 46 of the Corporation Tax Act 2009 makes the rule unless tax law says otherwise. Count December's sales in full and book January's refunds next year, and 2026's profit is overstated, with tax paid on it a year early.

VAT keeps its own timing. The VAT on a sale belongs to the period of the sale, and under the VAT Regulations a later refund is adjusted in the period in which the refund is paid. Refunds paid in January go on the VAT return that covers January, whatever the accounts do with them.

One shop's December

Illustration, not a real client. A clothing company in Dalston sells through its own website and reports under FRS 102 with the Section 1A disclosures. Its year ends on 31 December. All figures exclude VAT.

December's sales come to £60,000. In past Januaries, a quarter of December's orders by value came back for a refund, leaving aside size swaps. The clothes cost the company 40 per cent of their selling price, and it expects a tenth of what comes back to be damaged or sold off cheaply.

• Revenue for December: £45,000, the three quarters it expects to keep.

• Refund liability: £15,000.

• Stock expected back: the £15,000 of returns cost £6,000. Knocking off £600 for damaged and marked-down items leaves £5,400, which goes in as stock and comes off cost of sales.

Compared with booking all £60,000 as sales, the year's profit is £9,600 lower: £15,000 less revenue, offset by £5,400 less cost of sales. If the accounts are drawn up after January, the refunds actually paid on December's orders are evidence of what was owed at the year end, and the figures should use them in place of the estimate. A difference that only shows up after the accounts are signed is picked up the following year.

I see online sellers lose sight of their real profit because cash comes in all the time, and a December full of orders still to come back is one of the ways cash and profit drift apart.

Before 31 December

• Pull a year of returns data from your shop and separate refunds from exchanges.

• Work out the share of each month's sales that came back, by product line if the rates differ.

• Write down the estimate and how you reached it, because the standard asks for it to be revisited every year end.

• Agree with whoever prepares your accounts how the refund liability and the returned stock will be shown.

Our guide to what FRS 102 is and which companies use it covers the rest of the 2026 changes, including leases.

Keep January's refund report with the year-end papers, because it is the evidence the 2026 figures will rest on.

About the author

Harvey Dhillon is Founder and CEO of Zmartly, a UK accountancy firm for ecommerce sellers. He grew up in West London and began his career in investment banking finance at Barclays, before going full-time on Zmartly in 2020. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by Parker Burchfield on Unsplash.