--- title: "Record Customer Refunds, Credits & Chargebacks | MCC" description: "Book refunds with sales tax, credit memos and card chargebacks correctly. Worked example with numbers." url: "https://mcc-solutionsnj.com/bookkeeping/guides/recording-refunds-credits-and-chargebacks" --- Bookkeeping guide · Updated October 12, 2026 # Recording Customer Refunds, Credits and Chargebacks Returned money is one of the easiest things to record wrongly. A refund is not a negative expense, and a chargeback is not a normal sale reversal. Each has its own path through the books. By [Matthew Coleman](/about), MCC Solutions **Quick answer.** Record a customer refund as a refund against their original payment or invoice, which reduces the sale and the bank balance. Do not enter it as an expense, because that leaves gross sales overstated and hides how often returns happen. Want this handled for you? Monthly bookkeeping, cleanup and year-end close for small businesses. Start with a free health check of your books. [Free health check](/bookkeeping/health-check)[Get a quote](/bookkeeping/#interest) **Related:** [Void vs delete a transaction](/bookkeeping/guides/voiding-vs-deleting-transactions) · [NJ 1099 contractor rule (ABC test)](/bookkeeping/guides/nj-independent-contractor-rule-abc-test-2026) · [Trial balance explained](/bookkeeping/guides/trial-balance-explained) **Free tools:** [Bank reconciliation not matching?](/bookkeeping/bank-reconciliation-difference-finder) · [Are my books ready for taxes?](/bookkeeping/is-my-quickbooks-ready-for-taxes) [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## Refund after payment If a customer paid and you give the money back, create a refund against their original payment or invoice. The sale is reduced and the bank decreases. Do not enter it as an expense, because that leaves gross sales overstated and hides how often returns happen. Many companies track returns in a separate contra income account, such as sales returns and allowances, so the rate of returns is visible. ## Credit memos A credit memo reduces what a customer owes without moving cash. You might issue it for a price adjustment, a return or a service issue. Apply it to an open invoice, or leave it as a credit for future work. An unapplied credit sits on the customer's account and reduces receivables. Review these monthly so that old credits do not distort your aging report. ## Sales tax on returns If you charged sales tax on the original sale, a refund usually includes returning the tax. Make sure the credit memo or refund carries the tax too, so your sales tax liability falls by the right amount. Rules for timing and documentation vary by state, so check with the tax agency. Payment processors may refund the sale but not the fees, so record the unrecovered fee as a cost. ## Card chargebacks A chargeback happens when a cardholder disputes a payment with the bank and the funds are pulled back, often with a fee. Record the withdrawal as a reversal of the payment, restoring the customer's balance if you believe they still owe. Record the dispute fee as an expense. If you win the dispute, the funds return. Reverse your entry and note it. Keep a log of disputes, the evidence submitted and the outcome. ## Vendor refunds and supplier credits Refunds you receive from suppliers go against the original expense category. A vendor credit memo reduces what you owe them. Apply it to a bill or request a refund. Record the actual bank deposit as a refund of the original expense, not as income. Review all refund and credit activity each month. A spike can signal product issues, mistaken billing or abuse. The books can reveal operational problems if you look. ## A monthly returns review Total your refunds, credit memos and chargebacks each month and express them as a share of sales. Note the reasons if you have them. A steady low rate is normal. A jump is information: a faulty batch, a confusing description, a delivery problem or a customer service gap. Because these amounts are tracked in their own accounts rather than netted away, you can see the pattern and act on it before it grows. ## Worked example with numbers A customer paid $250 plus $16.56 sales tax and returns the item. Refund $266.56: reduce sales by $250, reduce sales tax payable by $16.56, credit cash $266.56. A chargeback on a different sale of $120 also costs a $15 fee. Record the reversal of $120 and the fee of $15 to bank charges. ## Mistakes that cost money Recording a refund as an expense. Forgetting the tax. Leaving credit memos unapplied. Not disputing a chargeback within the processor's window. ## Check your work Each month, total refunds and chargebacks and compare to the processor report. ## Common questions **Can I just delete the original sale?** It is better to record a refund or credit so there is a visible history. **What if the customer refunds to a different method?** Record the actual method used for the bank movement and link it to the original sale. **Are processor fees returned on refunds?** It depends on the processor. Check their terms and record any unrecovered fees. This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation. 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