Purpose: This document outlines the workflows in QuickBooks Online for customer refunds and overpayments to ensure sales revenue and Accounts Receivable balances remain accurate.
Decision Tree: Customer Refunds & Adjustments
Quick-Reference Cheat Sheet
| Scenario | Original QBO Form | Is Revenue Wrong? | QBO Tools Required | How Cash & A/R Clear Out |
| 1. Cash/POS sale returned or cancelled | Sales Receipt | Yes | Refund Receipt | Money leaves the bank directly; revenue decreases. |
| 2. Unpaid invoice amount reduced | Invoice | Yes | Credit Memo | Apply Credit Memo to open (existing or future) Invoice via Receipt Payment; no cash moves. |
| 3. Paid invoice was overcharged | Invoice + Payment | Yes | Credit Memo + Expense (coded to A/R) | Apply Credit Memo to Expense via Receive Payment. |
| 4. Customer paid extra on a correct invoice | Invoice + Payment | No | Expense (coded to A/R) | Link open Overpayment Credit to Expense via Receive Payment. |
Standard Operating Procedure (SOP) by Scenario
Scenario 1: Sale without Invoice (Point-of-Sale / Direct Cash)
- Goal: Return customer money and lower reported sales.
- QBO Steps:
- Click + New → Refund Receipt.
- Select Customer, Product/Service item, and original Payment Account (Bank/Credit Card).
- Back-End Journal Entries:
- Debit: Sales / Income Account
- Credit: Bank / Cash Account
Scenario 2: Unpaid Invoice Needs Reduction or Price Adjustment
- Goal: Lower customer’s open balance and reduce reported sales without moving cash.
- QBO Steps:
- Click + New → Credit Memo.
- Select Customer and Product/Service items to reduce.
- Click + New → Receive Payment, select Customer, check both the Open Invoice and Credit Memo to link them ($0.00 total).
- Back-End Journal Entries :
- Debit: Sales / Income Account
- Credit: Accounts Receivable (A/R)
Scenario 3: Paid Invoice Was Overcharged (Refund Needed)
- Goal: Reduce reported sales and send cash back to the customer.
- QBO Steps:
- Click + New → Credit Memo for the overcharged amount (creates a customer credit).
- Click + New → Expense (or Check). Set Payee to Customer Name, Category to Accounts Receivable, enter the refund amount.
- Click + New → Receive Payment, check off both the Credit Memo and Expense to clear the customer’s balance ($0.00 total).
- Back-End Journal Entries :
- Step 1 (Credit Memo): Debit Sales / Credit A/R
- Step 2 (Expense): Debit A/R / Credit Bank
Scenario 4: Invoice Was Correct, but Customer Overpaid (Refund Needed)
- Goal: Send extra cash back without altering reported sales.
- QBO Steps:
- Record full payment against invoice via Receive Payment (QBO automatically saves extra amount as an unapplied credit in A/R).
- Click + New → Expense (or Check). Set Payee to Customer Name, Category to Accounts Receivable, enter overpayment amount.
- Click + New → Receive Payment, check off both the Unapplied Credit and Expense to clear the customer balance ($0.00 total).
- Back-End Journal Entries:
- Step 1 (Receive Payment): Debit Bank / Credit A/R
- Step 2 (Expense): Debit A/R / Credit Bank