How to Categorize Refunds in QuickBooks

To categorize refunds in QuickBooks, you need to match them to the original income or expense account so your books stay accurate. If you refund a customer, you’ll reduce revenue; if a vendor refunds you, you’ll lower expenses; and if your bank reverses a fee, you’ll offset charges.

Identify the Type of Refund

Before entering the refund in QuickBooks, determine what kind of refund you’re processing:

• Customer refund: Returning money to a customer for a return, service cancellation, or overpayment.
• Vendor refund: Receiving money back from a supplier after returning inventory or overpaying a bill.
• Bank/credit adjustment: Refunds issued due to transaction errors or overcharges.

Categorization depends on this distinction. For example:

Record a Customer Refund

If you’re refunding a customer:

1. Go to the + New button in QuickBooks Online.
2. Select Refund Receipt.
3. Enter the customer name.
4. Choose the payment method (e.g., cash, bank transfer, credit card).
5. Select the bank account from which you issued the refund.
6. In the Product/Service field, pick the original item being refunded.
7. Under the Category, select the same income account originally used. This keeps your revenue reports accurate.
8. Enter the amount refunded and add a memo (e.g., “Refund for Invoice #1234”).

Example: If a customer bought a $200 roofing service package and requested a refund, categorize it under Service Income to reduce the original sales income.

Record a Vendor Refund

If you receive a refund from a supplier:

1. Click + New and select Bank Deposit.
2. In the Received From field, choose the vendor.
3. Select the Payment Method (check, ACH, etc.).
4. Pick the bank account where the refund was deposited.
5. In the Received From line, choose the expense category originally used for the payment (e.g., Office Supplies, Inventory).
6. Enter the refund amount.

Example: If you returned $150 worth of roofing materials, categorize the refund under Inventory/Materials Expense. This reduces your overall supply costs.

Categorize Bank or Credit Card Refunds

Sometimes, your bank or card provider refunds fees or errors. To record:

1. Select Bank Deposit from the + New menu.
2. Enter the bank or credit card company as the received-from party.
3. Under Category, choose the original expense category used (e.g., “Bank Charges”).
4. Enter the refund amount.

Example: If a $35 overdraft fee was reversed, categorize it under Bank Charges so your expense report correctly reflects the net fee paid.

Reconcile Refunds During Bank Reconciliation

When reconciling, match each refund in QuickBooks with the transaction appearing in your bank statement. Always double-check:

• The date matches your bank statement.
• The amount matches exactly.
• The category aligns with the original income/expense.

This prevents duplicate records and ensures financial statements reflect accurate balances.

Use Reports to Review Refund Categories

Run reports regularly to ensure refunds are categorized correctly:

• Profit and Loss Report → Confirms income reductions from customer refunds.
• Expense by Vendor Report → Shows vendor refunds against expense accounts.
• Bank Reconciliation Report → Confirms that refunds clear the right bank accounts.

Bonus Tip: Simplify Refund Tracking with DepositFix + QuickBooks

If you use DepositFix with QuickBooks, refund tracking becomes even simpler. Payments, invoices, and refunds sync automatically, so you don’t need to manually re-enter data. This eliminates errors and keeps all customer records in one place, saving you time and making your books more reliable.