What Is a Chargeback? Complete Guide to Chargeback Processing in ERP

Key Takeaways on Chargeback Processing

• A chargeback is a financial adjustment raised after a transaction to correct disputes, errors, returns, or cost corrections in your ERP system.
• Chargebacks are created only after an original transaction exists—whether it’s an invoice, payment, receipt, or expense.
• The five main types include customer chargebacks, vendor chargebacks, inventory chargebacks, promotional/trade chargebacks, and internal chargebacks.
• The chargeback process follows six steps: original transaction → issue identification → chargeback creation → approval workflow → financial posting → settlement and closure.
• Manual chargeback processing fails at scale due to volume overwhelm, inconsistent decisions, duplicate approvals, and audit exposure.
• AI-powered chargeback automation can reduce manual processing by 85% while improving accuracy and audit readiness.

Last quarter, a mid-sized beverage distributor’s finance team was grinding through the month-end close. They were processing 400+ chargebacks monthly. Promotional deductions, vendor disputes, pricing corrections—the usual chaos.

The controller looked exhausted. His team had been working 12-hour days for a week straight.

Their process told the whole story. Chargebacks lived in a shared Excel file. Approvals happened over email. Documentation was scattered across Outlook folders, shared drives, and sticky notes on monitors. One analyst spent her entire day just tracking down missing invoice references.

The real problem? Three duplicate chargebacks had been approved that month. Same vendor. Same amount. Slightly different descriptions. Nobody caught them until the vendor called to ask why they had received triple payment.

That’s $47,000 walked out the door. And nobody even noticed.

This isn’t unusual. It’s what happens when chargeback volumes outgrow manual processes. The finance team wasn’t incompetent—they were overwhelmed. And when teams are drowning in spreadsheets, duplicates slip through. Approvals get inconsistent. Audit trails fragment. Month-end close stretches from 3 days to 8.

So, the question is: How do organizations bring order to this chaos before it costs them real money?

It starts with understanding exactly what chargebacks are, how they flow through ERP systems, and where the process breaks down at scale.

This guide walks through everything finance teams need to know about the chargeback process. Here’s what it covers:

• What Is a Chargeback?
• When Is a Chargeback Created?
• Types of Chargebacks in ERP Systems
• The Chargeback Process Flow (Step-by-Step)
• Accounting Impact of Chargebacks
• Controls and Compliance Requirements
• Why Manual Chargeback Processing Fails at Scale
• How Chargeback Automation Solves It
• Frequently Asked Questions (FAQs)

What Is a Chargeback?

A chargeback is a financial adjustment raised after a transaction when there is a dispute, error, return, or cost correction. It ensures that billing, payments, inventory, and accounting records remain accurate and balanced.

In simple terms: if money was charged incorrectly or needs correction, a chargeback brings it back in a controlled and auditable way.

Unlike a simple refund (which reverses a payment), a chargeback is a formal financial adjustment that flows through your ERP system. It affects multiple accounts, requires approval workflows, and generates audit documentation.

Chargebacks are essential for maintaining financial accuracy. Without them, discrepancies between what was invoiced, what was delivered, and what was paid would accumulate—creating reconciliation nightmares at month-end.

For alcohol distributors and beverage companies, chargebacks are particularly common. Promotional deductions, vendor rebates, damaged goods claims, and pricing disputes generate hundreds or thousands of chargebacks monthly.

When Is a Chargeback Created?

A chargeback is created only after the original transaction has occurred. You can’t have a chargeback without an invoice, payment, receipt, or expense to adjust against.

This linkage to the original transaction is critical. It creates an audit trail that links the adjustment to its source—something auditors specifically look for during reviews.

Common business triggers

Here are the situations that typically trigger chargeback creation:

• Incorrect pricing or quantity on invoice: The invoice shows $50 per case, but the agreed price was $45.
• Customer payment dispute: Customer claims they were overcharged or billed for items not received.
• Returned or damaged goods: Products came back due to quality issues, damage in transit, or wrong items shipped.
• Vendor overbilling: Supplier invoice exceeds the purchase order amount or includes unauthorized charges.
• Inventory shortfall or quality issue: Physical count reveals fewer items than records show, or products fail quality inspection.
• Internal cost reallocation: Shared services or IT costs need to be redistributed across departments or entities.
• Promotional deductions: Retailer deducts agreed promotional allowances directly from payment.

Pro Tip: Establish clear documentation requirements for each trigger type. When a chargeback is created, the supporting evidence should already be attached, reducing back-and-forth during the approval process.

Types of Chargebacks in ERP Systems

Not all chargebacks are the same. Understanding the different types helps you design appropriate approval workflows and routing rules for each.

1. Customer chargebacks

Customer chargebacks arise from disputes with your customers—typically retailers, wholesalers, or end buyers.

Common scenarios include invoice disputes, pricing disagreements, short shipment claims, and quality complaints. The customer either refuses to pay the full invoice amount or requests a credit for the disputed portion.

These chargebacks directly impact your Accounts Receivable and revenue recognition.

2. Vendor Chargebacks

Vendor chargebacks flow in the opposite direction. You’re claiming an adjustment from your supplier due to overbilling, damaged goods received, or failure to meet contracted terms.

For alcohol importers, vendor chargebacks often involve supplier pricing errors, co-op marketing reimbursements, or quality issues discovered after receipt.

These chargebacks affect your Accounts Payable and the cost of goods.

3. Inventory chargebacks

Inventory chargebacks address discrepancies between recorded inventory and actual physical counts. They are used when shrinkage, damage, or obsolescence creates a gap that needs financial recognition.

Common triggers include warehouse damage, theft or loss, expiration of perishable products, and cycle count variances.

These adjustments impact both inventory valuation and cost of goods sold.

4. Promotional/trade chargebacks

Promotional chargebacks are extremely common in beverage distribution. They represent deductions retailers take for participating in promotional programs—end-cap displays, volume discounts, seasonal promotions, and co-op advertising.

These are often high-volume (hundreds monthly) and require validation against promotional agreements before approval.

The challenge: promotional terms vary by retailer, product, and time period—making manual validation extremely time-consuming.

5. Internal chargebacks

Internal chargebacks reallocate costs between departments, divisions, or legal entities within the same organization.

Examples include IT service allocations, shared warehouse costs, corporate overhead distribution, and intercompany transfers.

While these don’t involve external parties, they still require proper documentation and approval for accurate cost center reporting.

Chargeback Types Comparison

The Chargeback Process Flow (Step-by-Step)

The chargeback process follows a consistent six-step workflow in most ERP systems. Understanding each step helps identify where bottlenecks occur and where automation adds the most value.

Step 1: Original transaction

Every chargeback starts with an original transaction. This could be a sales invoice, vendor bill, inventory receipt, or expense record.

The ERP system records the transaction, posting to appropriate accounts: revenue, cost, inventory balances, and customer/vendor balances.

Example: You issue a sales invoice for $50,000 to a retail customer for 1,000 cases of wine.

This original transaction serves as the reference point for all subsequent adjustments.

Step 2: Issue identification

Someone identifies a discrepancy that requires correction. This could be the customer, vendor, an internal audit, or automated exception detection.

The key is documenting what’s wrong and why it needs adjustment.

Example: The customer reports that only 950 cases arrived. They’re disputing $2,500 of the invoice (50 cases × $50).

At this stage, you need supporting documentation: delivery receipts, photos of damaged goods, email correspondence, or promotional agreements.

Step 3: Chargeback creation

A chargeback document is created in the ERP system and linked to the original transaction.

The chargeback record includes: 

• Reference to original transaction (invoice number, PO number)
• Reason code explaining the adjustment type
• Amount being adjusted
• Supporting documentation attachments
• Requestor information

This linkage is crucial; it creates the audit trail connecting the adjustment to its source.

Pro Tip: Standardize your reason codes. A consistent taxonomy (Pricing Error, Short Shipment, Quality Issue, Promotional Deduction, etc.) enables better reporting and pattern analysis later.

Step 4: Approval workflow

The chargeback enters the approval workflow. Different organizations structure this differently, but typical patterns include:

• Amount-based routing: Small chargebacks auto-approve; large ones require manager review.
• Type-based routing: Promotional chargebacks go to Sales Ops; vendor chargebacks go to Procurement.
• Role-based approval: Finance approves accounting impact.
• Compliance reviews regulatory implications.

The ERP tracks the chargeback status through the workflow: • Created • Under Review • Pending Approval • Approved / Rejected

Multiple approval levels may be required for high-value or high-risk chargebacks.

Step 5: Financial posting

Once approved, the ERP posts the accounting entries automatically.

Example Accounting Impact:

For the $2,500 short shipment chargeback: • Debit: Sales Returns and Allowances — $2,500 • Credit: Accounts Receivable — $2,500

The customer’s balance is reduced by $2,500. Revenue is adjusted accordingly.

Different chargeback types generate different journal entries, but the ERP handles this based on the reason code and account mapping.

Step 6: Settlement & Closure

The final step is settlement and closure.

For customer chargebacks, this might mean applying the credit to future invoices or issuing a refund check.

For vendor chargebacks, it might mean deducting from your next payment or receiving a credit memo.

The chargeback is marked as Closed, and the full audit trail is retained, including who created it, who approved it, which accounts were affected, and when each action occurred.

Accounting Impact of Chargebacks

Chargebacks affect multiple areas of your financial statements. Understanding these impacts helps ensure proper account mapping and accurate reporting.

Accounts receivable impact

Customer chargebacks reduce AR balances. The customer owes you less because you’ve issued a credit for the disputed amount.

If chargebacks are significant, they can materially affect your AR aging reports and cash flow forecasting.

Revenue and expense corrections

Depending on the chargeback type, revenue may be reduced (sales returns), or expenses may be adjusted (vendor credits).

Promotional chargebacks often hit contra-revenue accounts rather than directly reducing gross sales, preserving visibility into promotional costs.

Inventory adjustments

Inventory chargebacks require adjusting both the quantity and value of inventory on hand.

If 50 cases are written off due to damage, the inventory system needs to reflect both the physical reduction and the corresponding cost adjustment.

General ledger entries

Every chargeback generates journal entries that must balance. The GL provides the audit trail showing exactly how each chargeback affected your books.

Accurate GL posting is essential for the following:

• Month-end close accuracy
• Financial statement integrity
• Audit readiness
• Tax compliance

Example Journal Entries by Chargeback Type:

Controls and Compliance Requirements

Chargebacks involve money moving between accounts. That makes them a natural focus area for auditors and compliance teams.

Approval hierarchy importance

A clear approval hierarchy prevents unauthorized adjustments. Without it, anyone could create chargebacks and erode margins or commit fraud.

Best practices include: • Segregation of duties (creator ≠ approver) • Amount thresholds triggering additional approval levels • Mandatory documentation requirements • Time limits for approval (chargebacks can’t sit indefinitely)

Original transaction reference

Every chargeback must link back to its original transaction. Auditors specifically look for this connection.

Chargebacks without clear linkage to source transactions are red flags during audits. They suggest either poor controls or potential manipulation.

Audit trail requirements

The audit trail must capture: • Who created the chargeback and when • Who approved (or rejected) it and when • What changes were made during the workflow • What accounts were affected by the posting • What documentation supports the adjustment

This trail must be immutable. Once created, audit records shouldn’t be editable or deletable.

Reporting and reconciliation

Regular chargeback reporting helps identify patterns: Are certain vendors generating excessive chargebacks? Are promotional chargebacks exceeding budgeted amounts? Are duplicate chargebacks slipping through?

Monthly reconciliation should verify that all chargebacks are properly closed and accounted for.

Pro Tip: Run a monthly chargeback analysis report. Look for anomalies: unusually high volumes from specific customers, repeated chargebacks for the same original transaction, or approval times exceeding your targets.

Why Manual Chargeback Processing Fails at Scale?

Manual chargeback processing works fine when you’re handling 20-30 chargebacks per month. But as volumes grow, the wheels start falling off.

The breaking points 

Volume overwhelm: When you are processing 200+ chargebacks monthly, manual review becomes a full-time job. Finance teams spend their days drowning in spreadsheets instead of doing analysis.

Inconsistent decisions: Different team members apply different standards. One person approves chargebacks that another would reject. This inconsistency creates audit findings and vendor disputes.

Duplicate approvals: Without automated detection, the same chargeback can be submitted multiple times with slight variations. Manual reviewers miss these duplicates, and you pay twice for the same adjustment.

Email approval chaos: Tracking approvals through email chains is a nightmare. Who approved what? When? Where’s the documentation? The answers are scattered across dozens of inboxes.

Audit exposure: When auditors ask for chargeback documentation, you’re scrambling to reconstruct trails from emails, spreadsheets, and file folders. It takes hours or days instead of minutes.

The Real Cost of Manual Processing

Let’s quantify the problem:

If your finance team costs $75/hour fully loaded, 50 hours of chargeback processing costs $3,750/month—$45,000/year. And that’s before counting the cost of errors, duplicates, and audit findings.

If duplicate approvals and month-end delays sound familiar, see how a U.S. beverage distributor automated 85% of its chargeback. Read the full case study: https://www.growexx.com/case-study/chargeback-process-automation-case-study/

Chargeback Automation Benefits

Modern chargeback automation doesn’t just track chargebacks—it actively processes them. The difference is crucial.

What a chargeback engine does

An AI-powered chargeback automation engine handles the entire chargeback process workflow in the stages as follows:

Stage 1: Business Rule Validation

Every chargeback is validated against mandatory business rules before any AI logic applies.

Rules include:

• Allocation must be set.
• The invoice reference must exist.
• Amount must be positive.
• Required documents must be attached.
• Amount must be below the auto-approval threshold.

If any rule fails, the chargeback is either auto-rejected or routed to manual review. Business rules are never overridden by AI.

Stage 2: AI Risk Scoring

Chargebacks passing rule validation receives a risk score (0-100) based on the following parameters:

• Vendor approval vs. rejection history
• Similar historical chargebacks
• Amount compared to normal range
• Dispute frequency patterns
• Time-based anomalies (month-end spikes)

Low scores (0-30) indicate low risk.

High scores (61-100) indicate an elevated risk that requires scrutiny.

Stage 3: Intelligent Routing

Based on rules + risk score + amount thresholds, the system routes each chargeback as follows:

• Auto-Approve: Low risk, all rules passed, within limits
• Manual Review: Medium risk, AI provides recommendation
• Auto-Reject: Clear violations (duplicates, missing data, policy breach)
• The Business Impact

Organizations implementing AI-powered chargeback automation typically see:

• 85% reduction in manual processing time • Near-zero duplicate approvals (AI catches them automatically)
• 70% faster chargeback resolution
• Complete audit trails generated automatically
• Continuous improvement — automation rate grows from ~60% in month one to ~85% by month six as the AI learns your patterns

The key differentiator: business rules remain the authority. AI enhances decision quality without replacing governance. Human reviewers still handle edge cases with full context and AI recommendations.

Conclusion

The chargeback process is fundamental to maintaining financial accuracy in your ERP system. Every dispute, error, return, or cost correction flows through this workflow—affecting AR, AP, inventory, and your general ledger.

Understanding the six-step process (original transaction → issue identification → chargeback creation → approval workflow → financial posting → settlement) helps you identify where your current process breaks down.

For most growing organizations, the breakdown happens at scale. Manual processing that worked at 30 chargebacks per month collapses at 200+. The result: delayed closes, inconsistent decisions, duplicate approvals, and audit exposure.

AI-powered chargeback automation solves this by automatically enforcing business rules, intelligently scoring risk, and routing decisions to the right outcome—without sacrificing governance or control.

With the right automation infrastructure, chargebacks become a managed process instead of a monthly crisis.

Ready to transform your chargeback processing? Book a demo with GrowExx’s automation experts to see how AI-powered chargeback automation works for distributors and beverage companies.