Customer Refund

After creating a Credit Memo, you have two options: apply it to open invoices or refund cash to the customer.

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After Credit Memo

Once a Credit Memo is created, the customer has a credit balance in A/R:

CREDIT MEMO RESULT
─────────────────────────────────────────────────────────────────

Before Credit Memo:
  Customer A/R Balance: $1,000 (customer owes you)

After Credit Memo for $300:
  Customer A/R Balance: $700 (reduced)

OR if Credit Memo > Outstanding:
  Customer A/R Balance: -$200 (you owe them!)

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Option A: Apply to Open Invoice

If customer has outstanding invoices, apply the credit to reduce their balance.

When to Use

• Customer has unpaid invoices
• No cash refund required
• Credit reduces future payments

How It Works

APPLYING CREDIT TO INVOICE
─────────────────────────────────────────────────────────────────

Invoice #INV-001: $1,000 (unpaid)
Credit Memo #CM-001: $300

Apply Credit Memo to Invoice:
  Invoice balance: $1,000 - $300 = $700

Result:
  - Customer now owes $700 instead of $1,000
  - Credit Memo fully applied
  - No cash movement

GL Impact

No additional GL entry - The credit memo already reduced A/R. Applying it to an invoice just links the records.

Partial Application

You can apply a credit memo to multiple invoices:

PARTIAL CREDIT APPLICATION
─────────────────────────────────────────────────────────────────

Credit Memo #CM-001: $500 total credit

Apply to:
  Invoice #INV-001: $200 applied
  Invoice #INV-002: $200 applied
  Remaining: $100 (can apply later or refund)

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Option B: Customer Refund

If customer wants cash back or has no open invoices, issue a refund.

When to Use

• Customer has no open invoices
• Customer requests cash refund
• Full refund on cancelled order
• Closing customer account

Flow Diagram

CUSTOMER REFUND FLOW
─────────────────────────────────────────────────────────────────

Credit Memo created
         │
         ├── Customer has credit balance
         │
         ▼
┌──────────────────────┐
│ CUSTOMER REFUND      │  ← Issue payment to customer
│                      │
│ GL: Clears A/R       │
│ Cash: Goes out       │
└──────────────────────┘

GL Impact

Account	Debit	Credit	Why?
Accounts Receivable	$100		Clear the credit balance (Asset ↑)
Cash/Bank Account		$100	Money goes out to customer (Asset ↓)

CUSTOMER REFUND GL EXPLAINED
─────────────────────────────────────────────────────────────────

After Credit Memo:
  A/R has negative balance = -$100
  (Negative A/R means customer doesn't owe YOU, YOU owe THEM!)

Customer Refund:
  A/R             $100  Dr  ← Clear the negative A/R back to zero
  Cash                  $100  Cr  ← Money leaves your bank

Result:
  A/R = $0 (account cleared)
  Cash decreased by $100 (refund paid out)
  Customer got their money back

Payment Methods

Method	GL Credit Account
Check	Bank Account
EFT/Wire	Bank Account
Credit Card Refund	Credit Card Clearing
Store Credit	Customer Deposit

REFUND BY PAYMENT METHOD
─────────────────────────────────────────────────────────────────

Check Refund:
  A/R             $100  Dr
  Bank Account          $100  Cr

Credit Card Refund:
  A/R             $100  Dr
  Credit Card Clearing  $100  Cr  ← Reverses original payment

Store Credit (no cash out):
  A/R             $100  Dr
  Customer Deposit      $100  Cr  ← Credit for future use

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Refund vs Apply: Decision

WHAT HAPPENS TO THE CREDIT?
─────────────────────────────────────────────────────────────────

After Credit Memo is created:
│
├── Customer has open invoices?
│   │
│   ├── YES ──▶ Apply to Open Invoice
│   │           (Reduces what customer owes)
│   │           No cash movement
│   │
│   └── NO ──▶ Customer Refund
│               (Return cash to customer)
│
└── Customer wants cash back even with open invoices?
                │
                └── Customer Refund
                    (then customer still owes on remaining invoices)

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Quick Reference

Comparison

Aspect	Apply to Invoice	Customer Refund
Cash Movement	None	Cash goes out
GL Entry	None (just linking)	Yes
Best For	Ongoing customers	Closed accounts, no AR
A/R Impact	Reduces balance	Clears credit

GL Summary

Action	Debit	Credit
Apply to Invoice	—	—
Customer Refund	A/R	Cash/Bank

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Common Scenarios

Scenario 1: Partial Return, Ongoing Customer

Customer returns $300 of a $1,000 order

1. Create RMA → Receive items
2. Create Credit Memo for $300
3. Apply Credit Memo to Invoice #INV-001

Result: Invoice balance reduced to $700
        Customer pays $700 instead of $1,000

Scenario 2: Full Return, No Outstanding Balance

Customer returns entire $500 order (already paid)

1. Create RMA → Receive items
2. Create Credit Memo for $500
3. A/R shows -$500 (you owe them)
4. Create Customer Refund for $500

Result: Cash refunded to customer
        A/R cleared to $0

Scenario 3: Price Adjustment, Mixed Resolution

Customer disputes $200 on Invoice #INV-001 ($800)
Customer also has Invoice #INV-002 ($300)

1. Create Credit Memo for $200 (from Invoice)
2. Apply $200 to Invoice #INV-001

Result: Invoice #INV-001 reduced to $600
        Invoice #INV-002 still $300
        Total owed: $900

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Next Steps

• Returns Overview - Back to overview
• Credit Memo - Credit Memo scenarios
• RMA Returns - Physical return process