Issue a Customer Refund for an Open Invoice in Which a Payment has been Applied – QuickBooks Long Version

This is the long Version. Click here for the short version.

Here is the scenario. Using QuickBooks, you billed your customer for services or goods. Your customer paid some of the amount due on the invoice. This invoice occurred in a prior period whether a previous month, quarter, or year. Now the customer wants to cancel the order and get their money back. The proper way to process a refund for this customer follows.

Tip: Before proceeding with the following steps, open the bank account from which you plan to issue a refund. Note the balance amount. Locate the Income account in your Chart of Accounts affected by this customer’s invoice. Right click and then click Quick Report. Make sure the Start Date is the date of the Customer’s Invoice and the End Date is the date you will issue the Credit Memo. Note the Total Income. In the Customer Center, locate the customer for whom you will enter a Refund. Note the Customer’s balance. Locate the Invoice the Customer wishes to cancel and open. Note the Balance Due.

After you complete the following steps, you can compare the end results to these original numbers to verify you completed the steps correctly.

  1. Go to Customer Center. Locate the customer’s name. Locate the invoice which your customer is cancelling. Print it for reference.
  2. On the Customer’s name, right click and then click on Create Credit Memo/Refund.
  3. On the Credit Memo, enter the Date of cancellation. On each line, enter the exact same items that were on the original invoice with the corresponding quantities and prices. It is helpful to add the words “Customer Cancelled Order” to the description lines for future reference. Check to make sure all the line items match the original invoice including tax if it was charged. Make sure the total matches the total on the original invoice.
  4. Click Save and Close. A pop-up comes up that reads:

“The credit memo or refund has a remaining balance which you may use. What would you like to do with this credit?

  • Retain as an available credit
  • Give a refund
  • Apply to an invoice

You will click in the circle for “Retain as an available credit.” Click OK.

  • Go the Customer Center and locate the customer’s name for which you just entered the Credit Memo. Locate the Invoice in the list of transactions for which you just wrote a Credit Memo/Refund. Once you locate the invoice, right click on it and click Edit Transaction. The invoice will open.
  • On the menu bar for the Invoice screen, click on Apply Credits. A pop-up comes up which shows you the amount of the Credit Memo you just created. It shows the date of the Credit Memo, the full amount of the Credit Memo, the amount to use towards this invoice, and the Credit Balance. Click on Done. Save and Close the Invoice.
  • In the Customer Center, locate the customer’s name. In the transaction list, right click the Credit Memo and click Edit Transaction. The Credit Memo opens. In the menu bar at the top of the Credit Memo screen, click on “Use credit to give refund”. A pop-up comes up for Issue a Refund. It shows the customer’s name, the amount, the date of the refund check (you can change the date), the type of refund (check), and the bank account from which to write the check (you can change the bank account). There is a place to write a memo such as Customer Refund. The box To Print is checked. You may uncheck this if you do not print checks on a printer but manually write them. Click on OK.

Congratulations, you just processed a refund for a customer who canceled his order after making payments!

To check how this affects your accounts, do the following:

  1. Open the bank account from which you issued the refund check. Locate the check written to the customer for the refund amount. This verifies the check is debited from the checking account. Compare the balance of your checking account now to the balance you noted before you issued the refund. The difference should be the exact amount of the refund check.
  2. Open the Customer Center and locate the customer’s name. Check the Customer’s balance. It should reflect a decrease of the Balance Due on the original Invoice. In the list of transactions for the customer, you should see the Credit Memo and the Check for refund along with the original Invoice and customer Payment.
  3. Go to the Chart of Accounts. Locate the income account used to track the income for the items that were on the Customer’s original Invoice. Right click and click Quick Report.  In Date Range, enter the date of the Customer’s original Invoice as the beginning date and enter the date of the Credit Memo as the end date. Scan down through the list of transactions and locate the customer’s original Invoice which increased total income. Scan to locate the Credit Memo which decreased the total income. The Total Income should be decreased by the amount of the Credit Memo as compared to the Total Income you recorded before you issued the Credit Memo.

Charging a Cancellation Fee: If you wish to charge the customer a cancellation fee, you must create a new invoice for the fee BEFORE entering a Credit Memo. Date this Invoice with the date you are using on the credit memo. (This is income in the current period.) Save and close the invoice. You should use a separate income account to track this type of Fee Income.

Follow the steps above, but when you get to #6 after closing the original Invoice, open the Invoice for the cancellation fee. Click on Apply Credits. When the pop-up comes up, verify the entries. Click on Done. Save and Close the invoice. In #7, the Refund amount will be decreased by the amount of the Cancellation Fee. Issue the Customer a refund of the credit balance.

Go to your Chart of Accounts and locate the Fee Income account. Right click on it and click Quick Report. You should see the Invoice for the Customer’s Cancellation Fee as an increase to this Fee Income account. Since you were using the Customer’s available credit to pay this invoice, you have no increase in your bank account.

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