How-to · Vendors and bills
How to record a vendor credit
Record a vendor credit as the reverse of a bill: debit Accounts Payable for that vendor and credit the expense or inventory account the original bill used. The credit then reduces what you owe and is applied against the vendor's next bill when you pay it.
How-to guides / Vendor credit
The accounting behind it
A supplier issues a credit (a credit note or credit memo) when you return goods, when they overcharged you, or as a goodwill allowance. It reduces what you owe them in accounts payable and reduces your cost.
Post the credit to the same account the original bill used, so the expense or cost of goods sold shows the true net cost.
A vendor credit is not cash. If the vendor sends money back instead, that is a vendor refund, recorded as a deposit.
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable (vendor) | Credit amount | |
| Expense or Inventory Asset | Credit amount |
Worked example: a $240 credit for damaged stock
You returned $240.00 of damaged tiles to your supplier and they sent a credit note. Your next bill from them is $1,500.00. Applying the credit, you pay $1,260.00.
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable (Tile Supply Co.) | $240.00 | |
| Cost of Goods Sold | $240.00 |
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable (Tile Supply Co.) | $1,260.00 | |
| Checking | $1,260.00 |
Common mistakes
- Recording the credit as income. It is a lower cost, not a sale.
- Waiting to record it until it is used, so A/P overstates what you owe in the meantime.
- Paying the next bill in full and forgetting the credit exists.
- Recording a vendor credit and then also a deposit when the supplier refunds the same amount in cash.
In the US and in Canada
United States
Purchases for resale normally carry no sales tax (you buy with a resale certificate), so a vendor credit is usually just the price. If you paid sales tax or use tax on the original purchase, the credit should include it.
Canada
The supplier's credit note should show the GST/HST adjusted. Reduce your input tax credits by that tax: if you claimed $31.20 of HST on the returned tiles, the credit note takes $31.20 back off your ITCs.
In AcboBooks
- Open Vendor Credits. Go to Vendors → Vendor Credits. The screen is titled Vendor Credit.
- Enter the credit. Choose the Vendor, the Date and the supplier's credit note number in Ref #. On each line pick the Account the original bill used, a Memo and the Amount.
- Save. Click Save Vendor Credit. It appears in the recent list with Void and Delete buttons.
- Use it. When you pay that vendor in Vendors → Pay Bills, tick the bill and click Set credits beside it (or type in the Credit column). Click Pay Selected Bills; the cash paid is the bill less the credit.
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
Is a vendor credit income?
No. It reduces the cost you recorded on the original bill and what you owe the vendor.
What if the vendor refunds cash instead?
Then don't record a vendor credit; record the money with Make Deposit. See the vendor refund guide.
Can I apply a credit without paying anything?
Yes. If the credit covers the whole bill, Pay Bills applies it and records nothing to pay.
Related how-to guides
Terms used here
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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