How to Record a Return in QuickBooks

Handling returns is a standard part of doing business, but recording them incorrectly in your accounting software can lead to inaccurate financial reports, skewed inventory counts, and messy tax filings. Getting it right ensures your books are reliable and a true reflection of your business performance. This guide will walk you through the correct step-by-step process for recording both customer and vendor returns in QuickBooks, covering the most common scenarios you'll encounter.

Recording a Customer Return (Sales Return)

When a customer returns a product or service, you need to do more than just hand them cash. You must reverse the original sale, adjust your sales tax liability, and, if applicable, return the item to your inventory. QuickBooks has specific tools designed for this process to ensure every account is updated correctly.

There are two primary ways to handle a customer return, depending on the original transaction and how the customer wants to be compensated.

Method 1: Using a Credit Memo

A credit memo is the most flexible and common way to record a return. It creates a credit on the customer's account that can be applied to an existing unpaid invoice, saved for a future purchase, or refunded.

Use a credit memo when:

• A customer returns an item they bought on credit (from an invoice).
• A customer wants store credit to use on a future purchase.
• You want to issue a partial credit for a damaged item without a full return.

How to Create a Credit Memo in QuickBooks Online:

1. Navigate to the + New button in the top left corner.
2. Under the "Customers" column, select Credit Memo.
3. In the "Customer" dropdown, choose the customer who is making the return.
4. Enter the Credit Memo Date. This is typically the date the return was processed.
5. Under the "Product/Service" section, select the exact items the customer returned. It's important to use the same items from the original invoice to ensure your inventory and sales accounts are adjusted properly.
6. Enter the Quantity of each item returned and verify the Rate and Amount are correct.
7. If you charge sales tax, QuickBooks will automatically calculate the tax credit. Ensure the correct tax code is selected.
8. Add a "Memo" or review the "Message displayed on credit memo" with details about the return for your records.
9. Once you've filled everything out, click Save and close.

Now that the credit memo is created, the customer has a credit balance. The next step is to decide what to do with it.

Applying the Credit Memo:

• Apply to an open invoice: If the customer has an unpaid invoice, QuickBooks will often automatically prompt you to apply the credit. You can also do this manually by navigating to the "Receive Payment" screen for that customer. The credit memo will appear as an available credit to apply against the open balance.
• Hold for a future purchase: If you do nothing, the credit memo will remain on the customer's account as an available credit. When you create their next invoice, you can apply it in the "Receive Payment" screen.
• Issue a refund: If the customer wants their money back and they originally paid by invoice, you first create the credit memo, then issue a check or expense refund.
  1. Go to + New > Check or Expense.
  2. Select the customer from the "Payee" dropdown.
  3. Choose the bank account the refund will be coming from.
  4. In the "Category" details section, select the Accounts Receivable account. This is a critical step. Selecting A/R tells QuickBooks you are paying off a credit balance for a customer.
  5. When you do this, QuickBooks will open a drawer on the right side of the screen showing you the outstanding credit memo. Link the check to the credit memo to close it out.
  6. Click Save and close.

Method 2: Using a Refund Receipt

A refund receipt is simpler and is used when a customer paid for goods at the time of purchase (using a credit card or cash) and you are giving them their money back immediately.

Use a refund receipt when the original transaction was recorded with a Sales Receipt, not an Invoice, and the customer is receiving a direct refund.

How to Create a Refund Receipt in QuickBooks Online:

1. Navigate to the + New button.
2. Under the "Customers" column, select Refund Receipt.
3. Select the Customer and the Refund Receipt Date.
4. Choose the payment method you are using to issue the refund in the "Refund From" dropdown. This should be the bank or credit card account from which the money is leaving.
5. Add the Product/Service items that were returned, just as you did for the credit memo. This ensures inventory is restocked and sales data is corrected.
6. Verify the quantity, rate, amount, and sales tax details.
7. Click Save and close.

A refund receipt is a single-step transaction. It simultaneously removes the cash from your account, adds the item back to inventory, and adjusts your sales and sales tax liability accounts.

Recording a Vendor Return (Purchase Return)

Returning items to a vendor follows a similar logic. You need to record a reduction in what you owe them (Accounts Payable) and decrease your inventory or expense accounts. The process ensures you don’t overpay your bills and that your Cost of Goods Sold is accurate.

Creating and Applying a Vendor Credit

In QuickBooks, a vendor return is almost always handled with a vendor credit. This is the direct equivalent of a customer credit memo. It documents the credit the vendor has given you.

How to Create a Vendor Credit in QuickBooks Online:

1. Go to + New in the top left corner.
2. Under the "Vendors" column, select Vendor Credit.
3. Choose the Vendor from whom you're receiving the credit.
4. Enter the Date shown on the credit memo the vendor provided.
5. In the "Category details" or "Item details" section, enter the details of the return.
   • Use Category details if you are recording a credit for an expense (like a partial refund for marketing services). Choose the same expense account used in the original purchase.
   • Use Item details if you are returning inventory items. Select the products being returned so QuickBooks can remove them from your inventory assets correctly.
6. Enter the amount of the credit or the quantity and cost of the items.
7. (Optional but recommended) Attach a copy of the credit note or any return authorization from the vendor using the "Attachments" feature for your records.
8. Click Save and close.

Once saved, this vendor credit sits on your account, reducing your total balance with that vendor.

Applying the Vendor Credit to a Bill:

The easiest way to use a vendor credit is to apply it to a future bill from the same vendor.

1. Go to + New > Pay Bills.
2. Select the outstanding bill you wish to pay.
3. QuickBooks will automatically see the available credit for that vendor and apply it, reducing the "Amount to Pay" for the bill.
4. If you don't want to use the full credit, you can adjust the amount in the "Credit Applied" column.
5. Proceed with paying the remaining balance of the bill.

What if the Vendor Sends You a Refund Check?

Sometimes, a vendor might send you a check instead of holding a credit for you. This often happens if you've already paid the bill in full. To record this, you'll use the "Bank Deposit" transaction.

1. First, create the Vendor Credit as described above. This is crucial as it records the reason for the deposit and adjusts your expenses or inventory.
2. Next, go to + New > Bank Deposit.
3. Choose the bank account where you are depositing the vendor's check.
4. In the "Add funds to this deposit" section, list the vendor in the "Received From" column.
5. In the "Account" column, select Accounts Payable (A/P). This tells QuickBooks the deposit is paying off a vendor credit balance.
6. Enter the amount of the refund check.
7. Click Save and close.

This process links the cash received to the vendor credit you created, correctly closing out the transaction and ensuring your A/P and cash accounts are accurate.

Final Thoughts

Mastering returns in QuickBooks protects the integrity of your financial data. Using dedicated transactions like credit memos, refund receipts, and vendor credits ensures that your sales revenue, inventory levels, accounts receivable, and accounts payable are always precise. Following these built-in workflows prevents reporting errors and provides a clear audit trail for every transaction reversal.

As you manage your daily accounting, more complex questions might pop up, especially around sales tax obligations for multi-state returns or inventory valuation methods. When you need a reliable answer based on tax code, Feather AI can assist. By providing instant, citation-backed answers from IRS rulings and state tax codes, it allows you to get an audit-ready response so you can move from bookkeeping tasks to strategic advising with confidence.