QuickBooks Customer Credit/Refund Processing

Understanding customer credit/refund processing in QuickBooks is critical to maintaining the general ledger account balances and easing the burden of bank reconciliation. QuickBooks has three options to process customer credits and/or refunds:

 

1. Retain credit on the customer account for use when paying another invoice,
2. Issue a refund by check or credit card, and
3. Apply the credit to an outstanding invoice on the customer account.

Issuing credit memos for customer credit processing ensures that the original transaction is reversed properly to the accounts receivable, inventory, income and cost of goods general ledger accounts (See example). Choosing one of the three customer credit options ensures the customer is receiving the type of refund application he or she desires.

 

However, many organizations circumvent the accounts receivable refund process by setting the customer up as a vendor and issuing a refund check through the check writing option. Reimbursing a customer by writing a vendor check does not reduce the income incurred through the original invoice. This procedure leaves income is overstated by the amount of the refund. If the customer's refund check does not use the item tab, inventory will not reflect the return of the product.

 

In addition, organizations processing customer payments by credit card often misunderstand the flow of credit card receipts to the operating account. For many organizations, customer credit card payments flow directly to the operating account. When the customer credit card payments are part of the operating account, the customer refund can be issued as if it were a check. This will then be reflected in the credit card processing software maintained outside of QuickBooks. For example, using the bank's credit card processing software, a customer refund is issued to the credit card. The customer refund must also be entered using the QuickBooks customer credit processing to ensure cash and the customer account are correctly recorded. To issue the customer credit in the credit card processing software only causes cash and income to be overstated.

 

Circumventing the established QuickBooks process for handling customer refunds can cause cash to be overstated, income to be overstated, cost of goods is overstated and inventory is understated if the goods are returned. This also puts additional strain on bank reconciliation process by increasing the amount of time needed to reconcile the exceptions that occur in the credit card processing and in creating the journal entries needed to reset the general ledger accounts affected circumventing the process.