How to Record a Refund or Credit Note for a Customer

When you need to give money back to a client (or reduce what they owe) you do it with either a credit note or a refund. They're not the same thing, and using the wrong one creates bookkeeping errors.

What You'll Need

Access to QuickBooks Online
The original invoice or payment the adjustment relates to
The amount being credited or refunded

The Difference Between a Credit Note and a Refund

	Credit Note	Refund
What it does	Reduces what the client owes you (or creates a credit for future invoices)	Returns actual cash to the client
Cash moves?	No	Yes
When to use it	Client was overbilled, work was partially delivered, or you're applying a credit to a future invoice	Client already paid and you're returning money to them

Normal Procedure

Issuing a credit note

Go to + New > Credit Note.
Select the Customer.
Enter the Credit Note Date and the Amount being credited.
Add a line item describing the reason (e.g., "Service adjustment: overbilled").
If California sales tax was charged on the original invoice, confirm the correct tax treatment on the credit.
Click Save and Close.

QBO will apply the credit note against the customer's oldest open invoice automatically, or you can apply it manually to a specific invoice. The credit also stays on the customer's account to apply to future invoices.

Issuing a refund

Use this when the client has already paid and you're returning money to them.

Go to + New > Refund Receipt.
Select the Customer.
Enter the Refund Date and Amount.
In the Refund From field, select the bank account the money is going out from.
Add a line item for what's being refunded.
Confirm the sales tax treatment if applicable.
Click Save and Close.

The refund reduces your bank balance and records the reduction in revenue.

Abnormal Procedures

You issued a credit note but the client wants cash back instead.

First create the credit note, then apply it to a Refund Receipt. In the Refund Receipt, you can reference the credit note. Let your NCO bookkeeper know so they can confirm the entries are correct.

The original invoice included sales tax and you're issuing a credit.

Your credit note must reflect the correct sales tax adjustment. If you collected and remitted California sales tax on the original invoice, the credit note reduces the corresponding tax liability. QBO handles this automatically if the tax is applied correctly to the credit note.

The client wants a credit toward a future invoice but you haven't created that invoice yet.

Issue the credit note and it will sit on the customer's account. When you create the next invoice, QBO will prompt you to apply the outstanding credit.

FAQ

Does a credit note affect my revenue?

Yes. A credit note reduces your recorded revenue for the period it's issued in. This is correct: if you overbilled or work wasn't completed, the revenue shouldn't be on your books.

What if I just want to write off an invoice because a client can't pay?

That's a bad debt write-off, not a credit note. The process is different. Ask your NCO bookkeeper to handle it. A write-off removes the receivable and records it as a bad debt expense.

Do I need to send the credit note to the client?

Yes. A credit note is a formal document. Send it to the client so they have a record that their balance has been reduced or that a refund has been issued. In QBO, click Save and Send to email it directly.

Can I apply a credit note to a different client by mistake?

Yes, so double-check the Customer field before saving. A credit note applied to the wrong customer will show up as a credit on their account rather than the intended one.