Supplier refunds and credit notes: close the loop

You return part of an order and $220 lands in the bank. The deposit isn't payment from a new customer. It belongs to a purchase already in the books, and the supplier's credit note explains which part changed.

First establish whether the supplier reduced an unpaid bill, refunded a paid purchase, or left a credit for a future order. Those outcomes can look similar in an email but leave different balances in the accounts.

Collect the bill, payment and credit note

Find the original supplier invoice and its ledger entry. Check whether it was paid in full, partly paid or still unpaid. Then compare the supplier's credit note with the items returned, quantity, amount and any goods and services tax (GST) shown.

If the amount differs from what you expected, ask the supplier to explain restocking charges, freight or a partial return. Don't record the expected refund while the documents show something else. If the original purchase was stock or an asset, the adjustment may belong there rather than in an ordinary expense account.

Compare the two settlement routes

This fictional business paid bill B-81 for $1,100. A valid supplier credit note C-17 reduces the purchase by $220. Amounts in the flow are gross; the example doesn't decide which BAS period receives an adjustment.

Shared starting point

Bill B-81: $1,100
Payment: $1,100
Bill balance: $0
Credit C-17: $220 available from supplier.

Route A: cash refund

Supplier returns $220 to bank.
Record settlement of C-17 and match the bank credit.
Supplier credit remaining: $0.
Net cash paid: $880.

Route B: next order

New bill B-96: $550.
Apply C-17: $220.
Pay remaining $330.
New bill and supplier credit both close to $0.

Route B control: total bills $1,650 − credit $220 = $1,430 net purchases. Cash paid is $1,100 + $330 = $1,430. There is no separate $220 bank refund in this route.

Original ASBG settlement diagram. Choose the route supported by the supplier statement and bank records; don't record both.

For a cash refund, Xero explains that a refund recorded against a credit note creates a payment transaction you can reconcile to the bank line. For credit against another purchase, its supplier-credit allocation guidance covers applying the credit to a bill from that supplier. Use the current instructions for your product rather than treating a bank deposit as new income.

Handle a partial settlement explicitly

If the supplier refunds only $100 of the $220 credit, record the $100 actually received. The remaining $120 stays available or unresolved, depending on the agreement. Keep the supplier's explanation with the record and follow up until the statement agrees.

An unpaid original bill is different again. A $220 credit against an unpaid $1,100 bill leaves $880 owing; it doesn't prove a cash refund occurred. Check the bank before creating a refund payment.

Review GST without rewriting the purchase history

A later change to a correctly reported purchase can require a GST adjustment. The ATO distinguishes that from correcting a figure that was wrong when lodged in its guidance on GST errors and adjustments.

Give the registered agent the original invoice, credit or adjustment note, original claim details and settlement date. They can check eligibility, required documents and reporting timing. Don't simply delete the original bill or change an old tax invoice to the net amount.

For a fully creditable, ordinary taxable purchase, a $220 GST-inclusive reduction contains $20 GST arithmetically. That doesn't establish when, or whether in full, your business must report it; cash-basis reporting and private use can change the analysis. The GST coding guide covers the surrounding classifications.

Reconcile the supplier account as well as the bank

Check that the original bill still shows its true payment history, the credit note isn't duplicated, and the settlement has used the correct amount. Compare the supplier's statement with your remaining bills and credits. If credit remains, include it in the next payment run so you don't pay a new bill in full by mistake.

Add old unused supplier credits to the monthly bookkeeping review. A bank reconciliation alone won't tell you that a credit is still waiting to be used.

Key takeaways

• Link the supplier adjustment to the original purchase.
• Record either the actual cash refund or the credit used against a bill.
• Keep any unsettled amount visible and review the GST impact.

Where to get help

Use Xero's credit-note instructions linked above and ask your registered agent about adjustments to reported purchases. The bookkeeping and BAS collection also covers customer credits and combined payments.