How to Handle Vendor and Customer Credits in QuickBooks

A vendor credit is money a supplier owes you back, and a customer credit (a credit memo) is money you owe a customer back. In QuickBooks you record each as its own transaction and then apply it to a bill or invoice, rather than editing the original. Applied correctly, a vendor credit reduces your next payment to that supplier and a credit memo reduces what a customer owes, and neither one leaves a stray negative balance behind. Getting this right keeps accounts payable and accounts receivable clean and your reconciliations tying out.

Credits often show up on the bank side too, as a refund deposit or a smaller payment. The tool at the top of this page can convert your PDF bank statement to a QuickBooks file so those refunds and adjusted payments are already in your register when you match them to the credit.

What is the difference between a vendor credit and a customer credit?

A vendor credit records an amount a supplier owes you, usually from a return, an overcharge, or a rebate. It sits against accounts payable and lowers what you will pay that vendor next. A customer credit, entered as a credit memo, records an amount you owe a customer, from a return, a discount after the fact, or an overpayment. It sits against accounts receivable and lowers what the customer owes you. They move in opposite directions, so entering the wrong one distorts both your payables and your receivables.

How do I enter a vendor credit in QuickBooks Online?

Click New, then Vendor credit. Choose the vendor, enter the date, and record the category or item and amount exactly as the original bill was coded, so the credit reverses the right expense. Save it. The credit now sits on the vendor's account. Nothing changes on your bank until you apply it, which you do the next time you pay that vendor. Enter the credit as soon as the supplier issues it, because a credit you forget about is money you never get back.

How do I apply a vendor credit to a bill?

When you pay the vendor, open Pay bills, select the bill you are paying, and QuickBooks shows any available credits for that vendor. Apply the credit, and the amount due drops by the credit before you cut the check or send the payment. If the credit is larger than the bill, apply what you can and the remainder stays on the account for next time. In QuickBooks Desktop the flow is the same: from Pay Bills, highlight the bill and choose Set Credits to apply it.

How do I record a refund check from a vendor?

If a vendor sends money back instead of a credit against a future bill, record it so it does not double-count. First enter a vendor credit for the amount, then record a bank deposit received from that vendor and, on the deposit, link it to accounts payable for the same vendor. Finally use Pay Bills to connect the deposit and the credit so they clear each other. Done this way, the refund shows in your bank, the credit is used up, and your payables balance is correct. Keep the supplier's credit memo on file; you can turn that document into a data file if you want the line detail alongside the transaction.

How do I create a customer credit memo in QuickBooks Online?

Click New, then Credit memo. Choose the customer, enter the product or service and amount being credited, and save. QuickBooks reduces that customer's balance. Depending on your settings, it either applies the credit to the customer's open invoices automatically or waits for you to apply it. Check Account and settings under Advanced to control whether QuickBooks auto-applies credits, because auto-applying can surprise you by moving a credit onto an invoice you did not intend.

How do I apply a credit memo to an invoice?

Open Receive payment for the customer, select the open invoice, and the available credit memo appears in the Credits section. Apply it, and the invoice balance drops by the credit. If you leave the credit unapplied, it sits on the customer's account and will reduce a future invoice. The key is that the credit and the invoice have to be the same customer; a credit memo cannot offset a different customer's balance.

How do I refund a customer instead of giving a credit?

When you send money back rather than credit a future invoice, use Refund receipt in QuickBooks Online. Choose the customer, enter what you are refunding, and select the bank account the money leaves from. That records the cash going out and reduces income appropriately. Do not also enter a credit memo for the same amount, or you will double the reduction. Match the refund to the payment that leaves your bank so your reconciliation stays clean.

Why do I have a negative balance from a credit in QuickBooks?

A negative accounts payable or receivable balance almost always means a credit was entered but never applied, or a refund was recorded twice. The fix is to find the unapplied credit and apply it to the matching bill or invoice, or delete the duplicate. Avoid clearing it with a journal entry, which hides the real cause. If negative balances have piled up, work through them one vendor and one customer at a time. There is a full walkthrough in the guide on how to fix negative accounts payable and receivable in QuickBooks.

Keep credits tied to real bank activity

Credits, refunds, and adjusted payments all eventually touch your bank, so the cleanest way to keep them straight is to reconcile against real statements. Convert each statement to a QBO file, import it, and match the refund deposit or reduced payment to the credit you recorded. Start with a PDF bank statement to QuickBooks conversion, and if you are catching up, batch convert several months at once. For contractors and other businesses that pay many suppliers, keeping every payment and credit in the books is what makes year-end and job costing hold up.