Pay a refund

Sometimes, a business owes money to a customer and must pay a refund. Two basic situations may exist, requiring slightly different procedures:

  • A refund is being paid from a cash sale or without reference to the customer’s Accounts receivable balance.
  • A customer defined under the Customers tab has paid in advance, paid more than was owed, or has been issued a credit note, so a credit is being reported as a negative balance (or entry) in Accounts receivable. However, the customer does not want the credit applied to a future sales invoice.

Refunds from cash sales

You might think a refund should be entered with a payment form, since you are making a payment to the customer. But recording a refund for inventory items with a payment form does not correctly reverse the original postings to an income account (for the amount of the sale) and the Inventory - cost expense account (for the cost of goods sold). More importantly, it also distorts the average cost of returned inventory items in the Inventory on hand account.

Recording the refund with a payment form also prepopulates unit prices with purchase prices rather than the sales prices used on the original sales receipt. Instead, record a refund with a receipt form, entering negative values.

Think of the refund this way: you recorded the original cash sale with a receipt, so it makes sense to reverse the sale with a negative receipt. This is similar to reversing a sale on a sales invoice with a credit note, which is like a negative sales invoice. You do not reverse a sale on a sales invoice by issuing a purchase invoice.

The easiest way to record a refund on a sale originally made by cash receipt is to locate and view the original sales receipt. Then use the Copy to function to create a new receipt from it:

You can also go to the Receipts tab and click New Receipt:

With either method, a receipt entry screen will appear. If you copied the original receipt to a new one, everything will already be filled in, but may still be edited. If you started with a new receipt, complete the form as you would for any other receipt, with one important difference. In particular, complete a line item for everything being fully or partially refunded:

  • If an inventory or non-inventory item was involved in the original purchase, choose it in the Item field. Most of the remaining fields will fill automatically, but may be edited.
  • Account will be filled automatically for inventory and non-inventory items. Otherwise, choose the same one to which the original purchase line item was posted. Because you will enter a negative value in one of the following fields (see below), Manager will deduct the appropriate amount from an income account, add to Inventory on hand, reduce Inventory - cost, and reduce the appropriate tax liability account.
  • Description describes the return/refund.
  • Qty is the number of units being refunded. Enter the quantity as a negative number. This is the important difference mentioned above. If an inventory item is not actually being returned, but only adjusted in price, leave this field blank.
  • Unit price is the amount being refunded per unit of return. If only a partial refund is being made, enter the actual amount being refunded. If no quantity was entered in the Qty field, enter the unit price as a negative number. Otherwise, enter a positive number.
  • Choose the same Tax code used for the original transaction.
  • Select a Division and/or Project if appropriate. These fields do not appear unless items or accounts for which they are allowed are selected.

Click Create when the form is complete. Remember to pay the customer.

Refunds of credit balances

Customer credit balances will be automatically applied to the customer’s next invoice:

But if the next invoice is unlikely to be issued soon or the customer has requested the credit be refunded, make a payment to reduce the credit balance.

Since inventory or non-inventory items will not be used for refunds of credit balances, this type of refund does not require use of a receipt form.

On the payment form, for Account, select Accounts receivable, then select the Customer. If the refund is associated with a specific invoice, select it in the Invoice field. Otherwise, leave that field blank:

On the payment form, all numbers should be positive. Click Create to save the transaction.

Refunding a credit balance only reduces the customer’s Accounts receivable balance. It does not adjust inventory or tax accounts. To do that, you must issue a credit note first.

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