How-to · Customers and sales
How to record a customer refund
A refund is two steps. First a credit memo reverses the sale: it reduces income and the sales tax you owe and leaves a credit on the customer's account. Then the refund pays that credit out of your bank or card account.
How-to guides / Customer refund
The accounting behind it
Recording a refund as an expense, or as a negative deposit straight to the bank, leaves your sales overstated and your sales tax or GST/HST too high. The credit memo undoes the income and tax lines of the original sale.
The credit memo on its own leaves the customer with a credit in accounts receivable. The refund then clears that credit: Accounts Receivable is debited and the bank (or the card account the money went back to) is credited.
If goods came back, the return also puts the items back into inventory; see how to record a sales return.
| Account | Debit | Credit |
|---|---|---|
| Sales income | Price | |
| Sales tax payable | Tax | |
| Accounts Receivable (customer) | Price + tax |
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable (customer) | Price + tax | |
| Bank or credit card | Price + tax |
Worked example: refunding a $300 service plus tax
You charged a customer $300.00 plus 13% HST ($39.00) for a workshop that was then cancelled. They paid $339.00. You issue a credit memo for $300.00 plus $39.00 HST and refund $339.00 from your bank account.
Your sales go down by $300.00, the HST you owe goes down by $39.00, and the customer's balance ends at zero.
| Account | Debit | Credit |
|---|---|---|
| Service Income | $300.00 | |
| GST/HST Payable | $39.00 | |
| Accounts Receivable | $339.00 |
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $339.00 | |
| Chequing | $339.00 |
Common mistakes
- Writing a check to the customer coded to an expense such as Refunds. Income and sales tax stay overstated.
- Refunding the price but not the tax, or the other way round. The credit memo should mirror the original sale lines.
- Refunding to a different card or account than the customer paid with, without noting why. Card processors usually require refunds to the original card.
- Issuing the credit memo and forgetting the refund, so the customer shows a credit you already paid back by hand.
In the US and in Canada
United States
When you refund the sales tax to the customer, states generally let you take the refunded sale off a later sales tax return. Each state sets its own rules and time limits.
Canada
To reduce the GST/HST you collected, the CRA expects a credit note to the customer showing that it is a credit note, your name and GST/HST number, the customer's name, the date and the tax adjusted. You generally have four years from the end of the reporting period in which the price was reduced.
In AcboBooks
- Create the credit memo. Go to Customers → Credit Memos. Choose the Customer, the Date and a Ref #, add the same items and amounts as the original sale, pick the tax rate, and click Save Credit Memo.
- Open the refund. In the Recent credit memos list under the form, click Refund on that memo.
- Fill in the refund. Choose Refund from (a bank account, or the credit card account if you refunded to a card), the Date, the Amount (it defaults to the unused credit), the Check / ref # (Cheque / ref # in the Canadian edition) and a Memo.
- Record it. Click Record Refund. AcboBooks debits Accounts Receivable and credits the account you chose, so the credit is used up.
If the customer still owes you on another invoice, you can click Apply on the credit memo instead of refunding, and set it against that invoice.
Menu names are from AcboBooks 0.2.1. Not using it yet? Try it free for 15 days, with the sample company to practise on.
Questions
Do I need a credit memo for every refund?
For a refund of a sale, yes: it is what reverses the income and the tax. A refund of a deposit you held is different, because no sale was recorded; see the guide to security deposits or the post on customer deposits.
What if I refunded to the customer's credit card?
Choose your card processing or merchant bank account as the account the refund leaves from, or the account the processor deducted it from. The credit memo part is the same.
Can I refund part of a sale?
Yes. Make the credit memo for the part you are refunding, with the matching tax, and refund that amount.
Related how-to guides
Terms used here
Sources
Updated October 25, 2026. General bookkeeping information, not tax, legal or accounting advice. Rules differ by state and province and change over time; check with the IRS, the CRA or your accountant for your own situation.
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