How to Add a Credit to a Bill in QuickBooks

Need to apply a vendor credit to an open bill in QuickBooks? Whether you’ve returned defective goods or received a rebate, correctly recording this transaction is key to keeping your accounts payable accurate. This guide will provide clear, step-by-step instructions for adding a vendor credit and applying it to a bill in both QuickBooks Online and QuickBooks Desktop.

What Exactly is a Vendor Credit in QuickBooks?

Think of a vendor credit as a form of store credit for your business. It's a non-cash transaction that reduces the amount you owe to a specific supplier or vendor. While you might receive a check for a refund, a vendor credit simply sits on your account with that vendor, ready to be applied against future or current bills.

Businesses receive vendor credits for many common reasons:

• Returned Goods: You purchased inventory or supplies and had to return some or all of the items due to damage, defects, or incorrect orders.
• Overpayment: You accidentally paid a bill twice or sent more cash than you owed. The vendor issues a credit for the overage.
• Pricing Disputes: The amount invoiced was incorrect, and the vendor agrees to credit your account for the difference.
• Service Credits or Rebates: You received a discount, rebate, or a credit for a service that didn't meet expectations.

Properly recording these credits is more than just good bookkeeping; it ensures your financial statements are correct. It prevents you from overpaying vendors, maintains an accurate Accounts Payable Aging report, and makes sure your expenses and inventory costs are not overstated.

How to Create a Vendor Credit in QuickBooks Online

The first step is to record the credit itself. This transaction tells QuickBooks Online (QBO) that a specific vendor now owes you money (or, more accurately, that you owe them less). Only after creating the credit can you apply it to a bill.

Follow these steps to create a vendor credit in QBO:

1. Click the + New button in the top left corner of your screen.
2. Under the VENDORS column, select Vendor credit.
3. From the Vendor dropdown menu, choose the vendor who issued the credit.
4. Enter the Date the credit was issued. This is typically found on the credit memo document the vendor sent you.
5. Enter the full amount of the credit in the Amount field.
6. Scroll down to the Category details or Item details section. This is the most important step for ensuring your books are accurate.
   • Use Category details if the credit is for an expense. Select the same expense account you used when you recorded the original bill. For example, if you returned defective office supplies, you would choose your "Office Supplies & Software" expense account. This reduces the recorded expense.
   • Use Item details if the credit is for products or inventory items you track in QuickBooks. Select the specific item you returned. This removes the item from your inventory count and reduces your Inventory Asset account.
7. Add a Description to provide context for the transaction. Something like "Credit for returned goods, original invoice #4582" is very helpful for future reference.
8. In the Ref. no. field, enter the credit memo number provided by your vendor.
9. Once you've filled in all the details, double-check them for accuracy and click Save and close.

At this point, you have successfully recorded the vendor credit. The credit is now available on that vendor's profile, waiting to be applied.

How to Apply the Vendor Credit to a Bill in QuickBooks Online

Now that you've created the credit, you need to apply it to an open bill. QuickBooks makes this process straightforward during the bill payment workflow.

Here's how to do it:

1. Click the + New button again.
2. Under the VENDORS column, select Pay bills.
3. The Pay Bills screen will show a list of all your open bills. Select the bill (or bills) for the vendor to which you want to apply the credit.
4. When you check the box next to a bill from a vendor who has an available credit, QuickBooks Online should automatically recognize and display the credit in the right-hand column. It will list any available credits for that vendor.
5. QuickBooks will automatically apply the credit, reducing the Total payment amount at the bottom of the screen. For example, if you have a bill for $1,000 and a credit for $150, the payment amount will update to $850.
6. If the credit amount is greater than the bill amount, the payment total will become $0.00, and the remaining credit will stay on the vendor's account to be used on another bill later.
7. Confirm the Payment date and the Payment account you are "paying" from—even if the total is zero, you still need to select an account to complete the transaction in the system.
8. Click Save and close (or specify another payment method if you're paying a remaining balance).

You can quickly confirm everything worked by running a report. Go to Reports > Vendor Balance Detail and find the vendor. You will see the original bill decreased by the credit application, and the bill payment entry closing it out.

Creating and Applying Credits in QuickBooks Desktop

The process in QuickBooks Desktop (Pro, Premier, or Enterprise) is conceptually the same but involves a slightly different navigation path.

Step 1: Create the Vendor Credit in QuickBooks Desktop

1. Go to the Vendors menu at the top of the screen.
2. Select Enter Bills from the dropdown menu.
3. At the top of the "Enter Bills" window, you'll see two radio buttons: Bill and Credit. Click on Credit. This action changes the form from a bill entry screen to a credit entry screen.
4. Choose the appropriate Vendor from the dropdown menu.
5. Enter the Date of the credit memo issued by the vendor.
6. Enter the Credit Amount and a Ref. No. from the vendor's credit document.
7. Use the Expenses or Items tab at the bottom of the form to categorize the credit.
   • The Expenses tab is for non-inventory credits (e.g., telephone bill, rent, professional services). Choose the same expense account as the original bill.
   • The Items tab is for crediting returned inventory parts. This ensures your stock levels and inventory asset value are adjusted correctly.
8. If you wish, add a note in the Memo field for internal records.
9. Click Save & Close.

Step 2: Apply the Vendor Credit to a Bill in QuickBooks Desktop

1. Go back to the Vendors menu at the top.
2. Select Pay Bills.
3. In the "Pay Bills" window, find and check the box next to the open bill for the vendor you want to pay.
4. As soon as you select the bill, QuickBooks Desktop will detect that a credit exists for this vendor. A message will appear informing you of the available credits.
5. Look for the Set Credits button (it's often near the bottom of the window). Click on it.
6. A new "Discount and Credits" window will open, displaying all available credits for that vendor. The credit you just created should be listed.
7. Check the box next to the credit you want to apply and click Done.
8. You will be returned to the Pay Bills screen. Notice that the value in the Amt. To Pay column has been reduced by the amount of the credit.
9. Verify that the final payment amount is correct, then click Pay Selected Bills to complete the process.

Best Practices for Managing Vendor Credits

Following a standard procedure is one thing, but adopting best practices will help prevent costly errors.

• Never Just Lower the Bill Amount: It can be tempting to simply edit the original bill and reduce the total. Do not do this. It creates a record-keeping nightmare because it leaves no audit trail of the credit transaction. Your records will not match the vendor's statement, and you will have trouble reconciling accounts payable. Using the official Vendor Credit function creates the necessary paper trail.
• Avoid Journal Entries for Credits: While a manual journal entry can get the numbers right on the P&L, it disconnects the transaction from the vendor's account in the A/P module. You won't see the credit when paying bills, and vendor balance reports will be inaccurate. Always use the built-in vendor credit tool.
• Regularly Review A/P Aging Reports: Run an Accounts Payable Aging Detail report at least once a month. Look for vendors with negative balances. A negative balance often indicates an unapplied credit. That's money you're entitled to, so be sure to apply it!

Final Thoughts

Recording and applying vendor credits is a fundamental two-part process that ensures your bills, expenses, and vendor balances are always accurate. Whether using QuickBooks Online or Desktop, sticking to the designed workflow creates a clear audit trail and maintains the integrity of your financial data.

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