How to Refund an Overpayment in QuickBooks Online

A client accidentally paid you twice, or maybe they sent more than their invoice was for. While it’s a good problem to have, it creates a customer credit in QuickBooks Online that you need to resolve. Simply writing them a check without telling your accounting software will leave you with an open credit forever and throw off your books. This tutorial will walk you through the correct, accountant-approved procedures for refunding an overpayment in QuickBooks Online, ensuring your records stay clean and accurate.

First, Identify the Overpayment

Before you can refund an overpayment, you need to confirm how it was recorded in QuickBooks Online. Typically, when you receive a payment from a customer that exceeds their open invoices, QuickBooks automatically creates a credit for that customer. You can see this in a few places:

• In the Customer Center, their balance might show as a negative number (e.g., -$50.00).
• On an Accounts Receivable (A/R) Aging report, they will appear with a negative balance.
• When you go to + New > Receive Payment for that customer, you'll see "Unapplied credits" listed.

Once you’ve confirmed the overpayment exists as a credit on the customer's account, you have two options: apply it to a future invoice or issue a refund. This guide focuses on issuing a refund, which is often necessary when the client requests their money back or you don't anticipate future business with them.

How to Refund an Overpayment Paid by Check or ACH

Refunding a customer who paid via check, ACH, or another cash-equivalent method involves a specific two-part process. You first create a transaction to represent the money leaving your bank account (a Check or Expense), and then you link that transaction to the customer's open credit to zero everything out. Following these steps precisely is key to keeping your A/R reports accurate.

Step 1: Create a Special "Accounts Receivable" Product/Service Item

This is a one-time setup step, but it is the secret to making this process work correctly. You need to create a special item that lets you post a transaction directly to your Accounts Receivable account. Normally, QuickBooks doesn't let you do this on most forms.

1. Click the Settings ⚙ icon in the top right corner and select Products and Services.
2. Click the New button and choose Service.
3. Name the service something clear and memorable, like "Overpayment Refund" or "A/R Clearing Item." You won't use this for anything else.
4. Here is the most important part: In the Income account dropdown, don't select an income account. Instead, find and select your Accounts Receivable (A/R) account.
5. Leave the rate and other fields blank. Click Save and close.

You now have a "Service" item that works as a tool to move money out of your Accounts Receivable account, which is exactly what we need to do to clear the customer's credit balance.

Step 2: Create the Refund Transaction (Using a Check)

Now, let's create the transaction that records the money leaving your bank account. If you are mailing a physical check, you'll use the "Check" function. If you're sending the refund via another method like an ACH transfer, an "Expense" transaction works just as well.

1. Click the + New button and select Check.
2. In the Payee field, choose the customer you are refunding.
3. Select the Payment account — this is the bank account the refund funds are coming out of.
4. Enter the Payment date and verify the check number matches your physical check stock.
5. In the Category details section below, find the "Product/Service" column. Select the special Overpayment Refund item you created in Step 1.
6. Enter a brief description, such as "Refund for Invoice #1234 Overpayment."
7. In the Amount column, enter the exact amount of the overpayment you are refunding.
8. Double-check that all information is correct, then click Save and close or Save and new.

At this point, you've recorded the cash leaving your bank and created an offsetting debit in your Accounts Receivable account. However, you haven't yet linked it to the specific unapplied payment. Your customer's account will now show both a credit (the overpayment) and a debit (the check), and our final step is to link them together.

Step 3: Link the Check to the Customer Credit

This final step is what clears the customer's A/R account and makes everything tidy. You'll use the "Receive Payment" screen as a tool to connect the dots.

1. Click the + New button and select Receive Payment.
2. In the Customer dropdown, choose the same customer you just issued the refund to.
3. QuickBooks Online will now display the open transactions for this customer under the "Outstanding Transactions" section. You should see two items:
   • The original unapplied credit (e.g., Unapplied amount: -$50.00).
   • The Check you just created in Step 2 (e.g., a Check for $50.00).
4. Check the box next to both of these transactions.
5. The total amount at the top should become $0.00. This confirms that you are using the check to "pay off" the credit.
6. Verify the date is correct and click Save and close.

You’re done! You have successfully recorded the refund and cleared the customer's overpayment credit from your Accounts Receivable. Their balance will now be zero (or back to whatever it was before the overpayment).

How to Process a Credit Card Refund

If the customer overpaid using a credit card and you process payments through QuickBooks Payments, the process is more direct. If you use a different payment processor, the steps are slightly different, but the principle is the same. The starting point for credit-based overpayments is often a Credit Memo.

Step 1: Create a Credit Memo

A credit memo is the proper way to record a reduction in what a customer owes you or to formalize a credit owed to them.

1. Click the + New button and select Credit Memo.
2. Choose the Customer from the dropdown menu.
3. In the Product/Service section, it's best to select the same item(s) from the original invoice they overpaid on. This ensures your sales revenue is properly reduced.
4. Enter the quantity and rate to match the amount of the overpayment. Ensure the total of the Credit Memo equals the refund amount.
5. Click Save and close.

You have now created a formal credit for the customer. Unlike the "unapplied payment" credit from a simple overpayment, this one is tied to your sales accounts. It now sits on the customer's account as an available credit, waiting to be refunded or applied.

Step 2: Issue the Refund from the Credit Memo

Once the Credit Memo is saved, QuickBooks gives you the option to issue a refund directly from it.

1. After saving the Credit Memo, you may be presented with options on how to handle it. If not, find and open the Credit Memo you just created.
2. At the top of the Credit Memo screen, you should see options for applying it to an invoice or issuing a refund. Choose to refund the customer.
3. A Refund Receipt window will appear, pre-filled with the customer's information and the refund amount from the Credit Memo.
4. Under Refund from, select the bank account where the money from your merchant processor is deposited. This is often called a "Merchant Account" or "Undeposited Funds."
5. Choose Credit Card as the payment method.
6. If you use QuickBooks Payments, you will likely see an option to process the refund right on this screen. If you use a separate processor, you'll need to first process the refund in your external merchant portal, then complete this step in QuickBooks to record it.
7. Verify all the information and click Save and close.

This method is simpler because QuickBooks handles the link between the credit and the refund transaction automatically.

Verify Your Work

After following either method, you should always do a quick quality check to confirm everything is correct.

• Run a Customer Balance Detail report: Go to Reports, search for "Customer Balance Detail," and select the customer you refunded. The net total for all transactions related to the overpayment should be zero. You'll see the original credit and the offsetting refund.
• Check Your A/R Aging Summary: Your customer should no longer appear on this report with a negative balance.
• Review the Bank Register: Open the chart of accounts and look at the register for the bank account you issued the refund from. You will see a withdrawal for the check or refund that matches the amount you sent back to the customer.

Final Thoughts

Handling customer overpayments in QuickBooks Online requires careful steps to ensure both your bank balances and accounts receivable records are accurate. By using a special A/R item for check refunds or a credit memo for card refunds, you create a clean audit trail and keep your customer balances correct.

Perfecting these kinds of bookkeeping procedures is a core part of an accounting professional's work, but client situations can often trigger deeper, more complex tax questions. When a unique refund scenario raises questions about revenue recognition rules or multi-state sales tax obligations, getting a fast, authoritative answer is critical. We built Feather AI to instantly provide citation-backed answers from IRS code and state tax law, helping you resolve complex client issues with confidence and speed.